Select Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht

Finance Bill 2017: Committee Stage (Resumed)

Chairman

We will now proceed in public session to consider the Finance Bill 2017. Deputy Neville is substituting for Deputy Deasy. I welcome the Minister, Deputy Donohoe, and his officials. With regard to arrangements for today, it is proposed that this meeting adjourn at 10 p.m. tonight if we do not finish beforehand. It is also proposed that we suspend at 1 p.m. and resume at 2 p.m. and take a second break between 5 p.m. and 6 p.m. Is that agreed? Agreed. The meeting will also suspend for Dáil votes when the Dáil is in session.

In order to provide for the smooth running of the meeting, any member acting in substitution for another member of the committee should formally notify the clerk now. Divisions will be taken as they arise and members attending this meeting in accordance with Standing Order 95(3) should be aware that, pursuant to that Standing Order, he or she may move his or her amendment but cannot participate in the voting on that amendment.

SECTION 10

Debate resumed on amendment No. 10:

In page 14, line 31, to delete “is incorporated and resident in the State, or” and substitute the following:

“is incorporated in the State, or in an EEA state other than the State, and is resident in the State, or”.

- (Minister for Finance)

Chairman

Does the Minister want to add anything further on this amendment?

Minister for Finance (Deputy Paschal Donohoe)

I thank the Chairman but I spoke on the amendment last night.

Deputy Paul Murphy

Is this the time to talk about the section in general or will we come back to that?

Chairman

The Deputy will be able to talk about the section in general at the end. We are dealing with amendment No. 10 for the moment. Amendments Nos. 10 to 12, inclusive, were taken together and discussed last night.

Amendment agreed to.

Deputy Paschal Donohoe

I move amendment No. 11:

In page 15, to delete lines 9 and 10 and substitute the following:

“other than—

(I) on the market known as the Enterprise Securities Market of the Irish Stock Exchange, or

(II) on any similar or corresponding market of the stock exchange—

(A) in a territory other than the State with the government of which arrangements having the force of law by virtue of section 826(1) have been made, or

(B) in an EEA state other than the State,”.

Amendment agreed to.

Deputy Paschal Donohoe

I move amendment No. 12:

In page 19, line 3, to delete “tax.”.” and substitute the following:

“tax.

That is correct. It is a tax expenditure, so there is a cost to us for doing it, but much of the engagement we have had with small and medium-sized companies that are active in particular sectors within our economy point to the fact that companies far larger than them have share option schemes that they are able to fund by their scale. They have indicated to us that a scheme such as this would be very helpful in supporting the retention and development of staff within smaller companies, in particular within Irish indigenous companies. This is why we think this scheme has value.

Deputy Paul Murphy

Does the Minister accept that the impact of the scheme is likely to be regressive? One could, in theory, be a low-paid employee and get share options, but it is not very likely. Those who avail of share options are more likely to be middle to higher income earners and, therefore, the effect would be regressive.

Deputy Paschal Donohoe

My experience, having dealt with this issue in recent months, is that the availability of share option schemes has changed within our economy. It rarely includes, to be fair to the Deputy's point, people on low incomes - I acknowledge that - but one of the developments that has occurred is that it now includes more and more middle-income employees, depending on the kind of industry they are in. I think we saw share option schemes in the past as being forms of compensation for senior executives, but it is now the case, particularly within companies that are active in the digital economy, that they are being used, for example, to incentivise engineers and software designers, people who would very much be seen as middle-income earners and who are operationally vital to companies. Those companies then use these schemes to try to retain those employees for the long run. We have a growing amount of feedback to the effect that it is difficult to do this if one is below a certain level. Companies that are below a certain level in scale tend to be more likely than not indigenous. Again, that is why we are doing this. However, the Deputy is correct in what he has said, that is, that this scheme will more than likely apply to people on middle incomes and above. The only exception I can think of is if someone were to join on perhaps some form of graduate recruitment scheme. Such schemes could include programmes such as this.

Deputy Michael McGrath

I have a number of questions to ask the Minister. A qualifying share option is defined in the section. They are new, ordinary, fully paid-up shares. Preferential shares are excluded. These shares constitute a share in the equity, a share in the ownership of the company.

Deputy Paschal Donohoe

Deputy Pearse Doherty

Is there a breakdown of the proportion of the costs that are drawn down by, say, a certain section of the companies? We see with other schemes that the major benefit goes to the top 100 companies in the State and so on, or is it-----

Deputy Paschal Donohoe

That information is available but I do not have it to hand. I will come back to the Deputy on it.

Deputy Pearse Doherty

I wish to go back to the fact that the Minister is extending this scheme. I am not opposed to its extension but I want to look at how he is making this judgment. It is provided for in the Finance Bill that a scheme will be introduced with a deadline; the deadline approaches; lo and behold, the deadline is extended. I cannot recall when a scheme in the Finance Bill that was supposed to end actually ended. Deadlines are more or less always extended.

What was the rationale there? What was the rationale originally for ending the scheme at a certain point and now continuing it? As we approach December 2020 we all know that it will, more than likely, be extended again.

Deputy Paschal Donohoe

I imagine that when the scheme was initially introduced it had a clause by which it could be ended in case the scheme was not meeting the objectives set for it. When I reviewed all of these allowances with my officials in advance of the Finance Bill, I received advice that this scheme was of help in delivering energy efficiency goals for Irish companies and the continuation of the scheme would support the delivery of that policy objective. That is why I made the judgment and the decision.

Deputy Pearse Doherty

When we put a deadline to a scheme, is it not to incentivise and force companies to do something, such as looking at energy-efficient equipment, because unless they do so they will not have the benefits later on? As schemes are extended over and over again, we send a message to companies that while there is a deadline and a scheme, for example, will not be available after 1 January 2018, in reality history shows that these schemes will continue on.

Deputy Paschal Donohoe

These amendments propose two technical changes to the legislation contained in section 12, which provides for the deduction of pre-letting expenses incurred in respect of residential property that has been vacant for one year or more. The amendments ensure that the provision operates as intended. The amendments relate to the operation of the clawback provision, which withdraws the relief if the property ceases to be let within four years. Amendment No. 13 clarifies that the sale of the premises within the four-year clawback period by the person who claimed the deduction for pre-letting expenses would trigger the clawback of the relief. Amendment No. 14 provides for the clawback of the relief to occur in the tax year in which the event that triggers the clawback arises.

Chairman

Are there any questions?

Amendment agreed to.

Deputy Paschal Donohoe

I move amendment No. 14:

In page 19, to delete lines 38 to 40 and substitute the following:

“(a) an amount equal to the deduction shall be deemed to be profits or gains computed under section 97(1) in the year of assessment in which that person ceases to let the premises concerned as a rented residential premises, and”.

Amendment agreed to.

Section 12, as amended, agreed to.

NEW SECTIONS

Deputy Pearse Doherty

I move amendment No. 15:

In page 20, between lines 6 and 7, to insert the following:

“13. The Minister shall within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the introduction of a vacant home tax.”.

This amendment relates to the vacant home tax. We have had a lot of conversation around the housing crisis and the emergency the State has gone through in recent years, despite the fact that the Government fails to admit that it is an emergency. There is a huge number of vacant homes across the State in areas where there is high pressure for housing. Sinn Féin has, for quite a considerable period, called for a vacant home tax. Sinn Féin's housing spokesperson, Deputy Ó Broin, is leading the charge on this, among many other issues. It baffles me that we have not seen any progress on a vacant home tax in budget 2018. I am not arguing that every vacant property be taxed as a vacant home but at a time of huge crisis in the State and in areas of high housing pressure, it is immoral that there are vacant homes while 3,000 children and 5,000 adults are living in emergency accommodation. In the past few months, Irish citizens have died on our streets. People who are homeless are being forced to survive in the elements. We need incentives to get vacant homes back into operation.

The previous section, which we discussed, contains minor incentives such as allowing pre-letting expenditure to be written off against rental income. This is welcome and we support that amendment but it does not go far enough. We need to take out the big stick in respect of the properties lying vacant in inner city Dublin. The State needs to send a message to investors that if they leave their properties vacant at a time when there is massive pressure on the housing market and on supply, the State will tax them. This amendment proposes that within six months of the passing of the Act, a report would be prepared and laid before the Dáil on the subject of the introduction of a vacant homes tax. The amendment takes this form because the Opposition is not allowed to table an amendment to immediately introduce a vacant homes tax. If we had that ability I would have tabled an amendment to that effect. It is important the Minister and the Government move on this without delay as we have had enough announcements. We need serious action and I cannot understand why we are not considering a vacant home tax at this point in time.

Deputy Paschal Donohoe

This amendment addresses vacancy, which is a policy area acknowledged by the Government as being central to housing challenges. In response, a key objective, identified in the fifth pillar of the Government's action plan on housing and homelessness, Rebuilding Ireland, is to ensure that existing housing stock is used to the optimum degree and it focuses on measures to use existing vacant stock to renew urban and rural areas and meet housing needs. While building new homes is a key action, another effective way to meet our housing needs is to bring vacant and under-utilised properties back into full use. Vacant properties are an important source of potential accommodation supply as they are typically already served by existing infrastructure. Their reuse has the potential to reduce the number of additional new homes required and to renew both the urban and rural areas of which they form an intrinsic part.

As regards specific measures taken by Government to tackle vacancies, action 5.1 commits to the development of a national vacant housing reuse strategy, the publication of which is expected shortly. Action 5.9 commits to reviewing planning legislation to allow the change of use of vacant commercial units in urban areas, including vacant or under-utilised areas of ground floor premises, into residential units without having to go through the planning process. A multidisciplinary working group, led by the Department of Housing, Planning and Local Government, will be working to bring greater clarity to the regulatory requirements that apply and to advise both industry and local authorities on how best to facilitate the reuse or development of under-utilised older vacant buildings in the context of the regulatory requirements. At local authority level, it is considered that there is scope for some early actions and in August 2017, all local authorities were required to designate vacant home offices and to draw up vacant home action plans to identify the real scale of vacancy in their areas, to set an ambitious but realistic target for which vacant homes could ultimately be brought back into use, whether for private sale, rent or social housing purposes, and to engage with owners to this end. The first of these action plans were submitted to the Department of Housing, Planning and Local Government last week.

Other initiatives include the repair and leasing scheme; buy and renew scheme; and the Housing Agency acquisition fund. Many other approaches have been considered by Government in tackling vacancy issues. On the possibility of introducing a new vacant homes tax, a strong rationale would be needed. It would also need to be demonstrated how exactly such a tax would achieve and deliver the desired outcome. Proof would be needed as to how its public benefit would, for example, outweigh rights contained within the Constitution. The fairness and proportionality of such a tax would need to be carefully considered, as would necessary exemptions, lead-in times, collection and many other issues. Bearing in mind such complexities and the consequences of tax impositions, the Minister for Housing, Planning and Local Government sought legal advice from the Attorney General and that advice is currently under consideration. Consideration is also required as to the involvement and co-operation of the Department of Finance and the Revenue Commissioners, and the implementation costs.

As there are multiple aspects to a vacant homes tax, I therefore oppose this amendment, which commits to laying a report on the matter within six months.

Deputy Pearse Doherty

The Government has had a year to come up with a vacant homes strategy and it has failed to do so. This was supposed to have been done months ago. The Finance Bill is going through and there is no mention of a vacant homes strategy. The three initiatives the Government has set in train for vacant homes are all welcome but they are minor. They target some 6,500 vacant homes over a period of six years, which is 3% of vacant houses in the State. It is not an adequate response to the crisis we are facing. I urge the Minister, his Department and the Government to wake up to the realities that are out there. Other actions need to be taken to deal with this issue. There are 183,000 vacant homes across the State and 35,293 in Dublin alone. However, there are 3,000 children and 5,000 adults in emergency accommodation. When will we take out the stick to incentivise people to put their homes back into use?

The Minister said we needed to look at the constitutional rights of property but there is no bar to us applying a tax on a category of homes, and I do not need to be the Attorney General to say this. We have a tax on the majority of homes in the form of the property tax, and prior to that we defined a certain category of homes, which were non-principal private residences, and applied a tax to them for a number of years. It is completely lawful to tax houses not occupied by the owner just as it was lawful to tax houses which nobody occupied.

There needs to be an incentive for individuals to put their vacant stock back into use and a number of schemes can assist them in this but as it is not happening fast enough, we need a vacant home tax. It should apply to houses vacant for six months or more within local electoral areas, LEAs, in which there is a high level of housing need and a high level of vacancy. It would have to include exemptions for holiday homes, homes in probate, fair deal homes and so forth but it is not beyond our ability to design a scheme. The rate would need to increase year on year. The site tax is a similar idea to get vacant sites into use. We are critical of the site tax the Government introduced as it left it too long, the lead-in period was too long and the rates were too low but it does increase, thereby giving an incentive to people. Getting sites into use would be very welcome but the turnaround time would be long. Even if an owner sold a site to a developer today, there would be a two-year lead-in period before somebody turned the key in the door.

We accept that a cohort of the 35,000 vacant properties in Dublin will not be suitable to be brought back into public or private use but a large proportion are suitable. We need to introduce measures now as this is an emergency. The Minister said he would come up with a report but he has already failed to meet his own targets. Considering these matters without any clear commitments is not good enough. I stay in a hotel in Dublin while I am here and every day I come in to work I pass people who stay in the same hotel. Every day, they get their kids ready for school, put their uniforms on and take two or three buses to get to their primary or secondary school. What we have done to people in this State is horrible.

We cannot fix that overnight but this finance committee can bring in measures that would provide some light and comfort for those families. We were elected to have the power to introduce a vacant homes tax and to encourage the 183,000 owners of those homes to bring them back into use. Why are we not doing it? I cannot, for the life of me, understand that. The Minister needs to give me a good reason for not introducing a vacant home tax now. This is not day one of the crisis - it has been going on for years. The Minister has not given me a reason for it. All the amendment seeks is a report. It states: "The Minister shall within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the introduction of a vacant home tax." It does not even commit the Minister to introducing a vacant home tax but it tries to force the Government to bring forward a report on the vacant home tax for Members to have an informed discussion on the subject.

I would prefer the Minister of Finance to go further and say he will not tolerate 8,000 of our citizens being in emergency accommodation, or people dying on the steps of this building. He needs to send a clear message to landlords who are hoarding empty properties that, if they do so any longer, we will tax them. This tax should increase if they do not bring their properties into use within one year and there should be another increase after two years. This is an emergency and it requires emergency measures but nothing of this type is coming from the Minister. The Minister should send this message not just for the benefit of landlords, but for those who find themselves homeless in this State.

Deputy Joan Burton

I am conscious that the resources of the Revenue Commissioners are very limited so, while I agree with a lot of what was suggested by the previous speaker, unless Revenue gets the 500 extra staff it was promised I have no idea how they would be able to do such a report. We had a report on a specific area of corporation tax, which was carried out by the academic Seamus Coffey, and I suggest something along those lines. The data need to be collected and identified. There is a particular problem with commercial premises across the country, where the ground floors have not reopened and the upper floors are empty. There are complex issues with banks which are pursuing the owners of such premises but I am sure that, in many towns and cities, a significant percentage of upper floors can be utilised. There is not much chance of it, however, in the context of what we know of the complications with the banks. I support the idea of a report but I do not see where the resources are to get a meaningful report that will set out the actions that could be taken to address some of the issues.

In the RTÉ programme earlier this week, it was very clear that, in two or three of the worst cases where there were large numbers of people, the ground floors and rears of the premises in question had been commercial premises. Rackrenting landlords had cleared out the bottom floors and crammed in bunk beds, resulting in incredible abuse. I ask the Minister to come back with proposals and additional staff, or to set up a commission overseen by somebody like Seamus Coffey. The statistics from the Department of Communications, Climate Action and Environment show that there are vacant, boarded-up premises in towns all over the country where people might want to rent them and it would be useful to do something along these lines.

I make door-to-door calls around my constituency in Dublin and I am not sure the figures reflect what is available in my constituency. There are serious problems for many families as regards the HSE where a relative is in hospital but intends to come home again. Often this is not realistic and these are sensitive situations but something can be done to address them, despite the complex legal, technical, personal and family issues.

Deputy Michael McGrath

We need a profile of vacant properties, because while a tax would be suitable for some, it would not be for all. There are delays in the probate process. I am dealing with individual cases and currently they are taking months. A report during the summer stated that it was taking 16 months for probate to come through, but the properties in question remain vacant in the meantime. We need a breakdown of the 183,000 properties regarding those that are in the fair deal scheme and those that are in probate or caught up in legal disputes, of which there are many. Receivers are in control and we need the data urgently. Deputy Burton is right to identify the issue of upper floors. Within a ten- or 15-minute walk of this place one will find hundreds of properties on upper floors and over offices which are vacant and not being brought into use because of ridiculous planning rules. These are under our noses in Dublin city centre and they need to be dealt with.

Deputy Paschal Donohoe

I do not need reminding by Deputy Doherty or any other Deputy of the seriousness of the homelessness issue in this country and in this city. I live in and represent a constituency which is afflicted by this and I represent families who are dealing with the trauma of not having a home. I see it with my own eyes, and represent the people affected by the tragedy of not having a home or a stable roof over their heads from which they can send their children to school, in which they can cook dinner or help with the homework and where they can do all the other things families do who have their own homes. I am well aware of the incredible distress families are facing in this regard.

Last week, I said that I take the figures for the number of children at risk from poverty in our country as seriously as the economic indicators on what is happening with bond yields or unemployment rates. I am well aware of the challenges this poses to our economy and the unacceptable cost it imposes on society, families and on mums and dads and their children. I am doing, and will continue to do, what I can do as Minister for Finance and Public Expenditure and Reform to deal with the issue and this is why, next year, the Department of Housing, Planning and Local Government, led by the Minister, Deputy Eoghan Murphy, will receive an increase in resources. It is in recognition of the fact that we have to address the issue that, in the Rebuilding Ireland plan, the Department to receive the largest increase in its share of capital funding is the Department of Housing, Planning and Local Government.

I have said that we should move away from the State acquiring homes in the private market to building them via our local authorities and through other means. I also want this issue to be dealt with and it is not accurate to say no action is taking place. It is also unfair and inaccurate to say nothing is being done in relation to vacant homes.

I have already told the committee that by the month just gone, all local authorities in the Dublin area had to come back to the Department of Housing, Planning and Local Government with a vacant homes action plan to deal with this issue in local authorities with the powers that are available to them. As part of that, if there were additional measures we need to consider with regard to the issues and difficulties we have on all of this, that will also be done.

I will return to the amendment the Deputy has tabled. Let me talk about the statistics that are available to us and some of the challenges those statistics generate. For example, if we look at where we were between census 2011 and 2016, the stock of residential properties across that five-year period increased from 1.994 million to just over 2 million, which is an increase of 0.4%. The number of vacant properties fell in that period. It is at 183,312 units at the moment. The number of holiday homes went up and most of the reduction in vacant properties has been in urban areas where we saw a decrease of 35,000 units. The information available to us at the moment, which is information from the CSO, indicates that there are lower vacancy rates in the larger urban areas. If I look at who owns those vacant properties - this moves into the issue Deputy McGrath just raised - the information we have is hard to come by but it indicates that over one third of vacant properties are owned by citizens over 60 years of age. Potentially, the largest owner of this stock is our elderly and there are all kinds of reasons that property might not be in use. If we look at the change I have referred to, over 105,000 of the properties that were vacant in 2011 are now occupied. Of those, more than half are now rented out. Close to 40% are owner-occupied. In the urban areas that I referred to a moment ago, up to 70% of the properties that were vacant in 2011 are now rented and over half of those are by families with children. There has been a change in the number of vacant properties between then and now. Action is being taken by the Government to deal with this issue, such as the action plans I referred to by county. That information has been shared with the Department of Housing, Planning and Local Government in the past week.

I will address the Deputy's amendment. The Deputy is not asking me to consider the introduction of a vacant home tax. He is asking us to introduce a report within six months of the passing of the Bill on the introduction of such a tax. We have many challenges in terms of understanding how many homes are vacant, why they are vacant, who owns them and for how long they have been vacant. The challenge for me is that to give an indication that this tax will be brought in without answering all of those questions first will yield further issues and questions that would have me back before the committee pretty promptly. I will not commit to that principle until I am clear about how I can handle those matters.

Deputy Burton made a fair point. There is information, most of it from the CSO, trying to help us to understand this issue. More work needs to be done on this by the Department of Housing, Planning and Local Government, with which I will help it. I want to bring this work to a conclusion as soon as possible. There are policy issues that need to be conclusively addressed to allow me to make a final assessment on whether there is a role for a vacant home tax. Until those questions are finally answered, I cannot commit to that principle. Where I will not yield any territory is on the commitment to ensuring the trauma of children and families in hotel rooms and those who are homeless is dealt with conclusively. That is what I want to see happen and I will see it happen. For the reasons I have outlined, I cannot commit to the principle of the introduction of this tax because there is work under way already on how the issue could be dealt with at local authority level. There are too many matters I want to resolve before I can commit to that principle. I want to resolve those matters. I want to be in a position where I can come back to the Oireachtas or committee and answer conclusively the different questions being put to me regarding the information that is available.

Deputy Pearse Doherty

The Minister pointed out to me and the committee that he is fully aware of the homelessness crisis. I accept that, although ignorance would not be a defence anyway. Being fully aware of it and then taking no action or not taking the appropriate action makes it even worse. The Minister gave us figures about how many vacant homes came into use between 2011 and 2016. During the Minister's time in Cabinet, as Minister for Public Expenditure and Reform, and now as Minister for Finance and Public Expenditure and Reform, the homelessness and housing crisis has gone out of control. More children and adults are in emergency accommodation and more people are homeless and dying on our streets under the Minister's watch. The Minister and his Government, through the decisions of Cabinet, have tolerated the homelessness crisis. This is not an act of natural disaster. We do not have a homelessness crisis as a result of a tsunami, an earthquake or an act of God. We have it because of Government policies which stopped the building of social housing or did not adequately funding social housing.

The Minister will talk about the package that was given in this year's budget. Not one single social house above the Minister, Deputy Simon Coveney's targets of this time last year will be built as a result of the money the Minister has provided. The Minister tells us he understands and I am sure he does; I believe he is a compassionate person but compassion needs to go a bit further. The Minister needs to act because there is a crisis. The Minister says he does not need to be lectured about it. We do not have the luxury of waiting for another year so the Government can get its act together and start to consider the introduction of a vacant property tax. The arguments the Minister has put before the committee border on the ridiculous. He talks about one third of the owners of the 183,000 vacant properties being over the age of 65. He says that might explain why they are vacant homes. Even if we disregarded all of those owned by over-65s, we would still have 120,000 vacant properties in the State. I am not assuming that all of those can be brought into use. What I am saying is that if a portion of those in Dublin could be brought into use, we would resolve the housing and homelessness crisis at a greater speed.

This is not the Minister's first day in office. How long has he been in Cabinet? As Minister for Public Expenditure and Reform, he has been approving decisions by the Minister for Housing, Planning and Local Government and the previous Minister for Finance that have not gotten to grips with this issue. Not only have Government decisions not got to grips with the issue, but they have made it worse. The Minister might not like to hear that because I am sure he has empathy for every person who finds themselves homeless but when he decides on budget day to put a particular amount into tax cuts as opposed to putting it into building new houses, the automatic result is that the family in room 401 is going to be in room 401 this time next month and for months after. The Minister is unwilling to bring forward a report which looks at the introduction of a vacant home tax. The Minister talks about considering it. Although I would disagree, the report could say there is no merit in bringing forward a vacant home tax. As a member of the Opposition, I am trying to challenge the Government years into a crisis of homelessness and housing.

I am trying to do so in the only way possible, namely, through the Finance Bill, because Opposition Members are not able to table amendments that would give rise to a cost on the Exchequer. This is an attempt to force the Minister to take some action by providing certainty that within six months of the passing of the Bill, a report would be produced on the introduction of a vacant house tax. Such a report would capture all of the issues Members have raised, whether it be the capacity of the Revenue Commissioners to apply a vacant homes tax or the data to which Deputy Michael McGrath referred for probate and the different categories of individuals who own the 183,000 vacant homes. What the Minister is telling us, however, is that it will be business as usual and that no action will be taken in the Finance Bill to introduce a vacant home tax on the 183,000 empty properties. That is not good enough.

I make no apologies for telling the personal stories of homeless families, the children involved and what these families are experiencing in terms of their mental health. I will continue to do so because I still believe the Minister simply does not get it. We have to ask ourselves what this country has become and who we are as a nation and people. Why do we tolerate having 8,000 homeless persons and hundreds of patients left on hospital trolleys every day? Why do we tolerate tax avoidance on a massive scale by major corporations? While that is the country it has become, it is not what citizens want. They want the Government to take serious action to address the housing and homelessness crisis. There are approximately 20 people homeless in County Donegal where the level of homelessness is nowhere near as bad as the crisis level in Dublin. However, even people in my county who are not touched by homelessness want the problem in Dublin to be sorted. They have empathy and sympathy and want the Government to act.

The measure we are seeking is not radical but a small matter of introducing a vacant home tax. For God's sake, given that we introduced a second home tax in 2010, why can we not introduce a vacant home tax at a time when there is a housing and homelessness emergency? The Government's refusal to do so makes no sense.

Chairman

We must suspend the sitting to allow members to vote in the Dáil.

Sitting suspended at 11.15 a.m. and resumed at 11.30 a.m.

Chairman

We are back in public session and I call Deputy Boyd Barrett.

Deputy Richard Boyd Barrett

I want to add my voice of support for Deputy Pearse Doherty's amendment on the issue of vacant tax. The urgency of a vacant unit or vacant home tax simply cannot be overstated. Let me put a human face on this matter because often, when we debate financial matters, one only hears dry figures, statistics and so on.

I have a long litany of cases that people in dire circumstances bring to my office every single week. This week, a young woman in her early 20s came to my office. She has been homeless with her young child for two and half years. Her child is now five and half years old. They have been housed in eight different emergency accommodations, including the Clondalkin Sonas homeless accommodation where there was a fire. As the Minister will know, one mother and three babies were killed due to the fire. The young woman who came to my office had been in that hostel and she was very close friends with the woman who died. She is completely traumatised, as is her son. She is still in emergency accommodation. Her son is now in his third school in two and half years. They are utterly traumatised and they have no idea when they will be housed. The signs are, given the state of the list operated by the Dún Laoghaire-Rathdown County Council, that it could be years. The woman broke down several times in my office. She is completely unable to cope. She blames herself, she thinks she is a terrible mother for putting her child in this situation and pleaded for a secure roof over their heads.

Side by side with that, close to the emergency accommodation that she is in now, and I highlighted this case before but I suspect that it is the tip of the iceberg, I highlighted recently a block of apartments in Sandyford. I refer to the Robin Hill apartments in Balally. The apartments have been owned by NAMA since it was set up. NAMA has sat on between 15 to 20 empty units since it took them over the loan of the developer. Recently, NAMA sold the properties to a vulture fund that tried to evict the rest of the tenants. All the while, between 15 and 20 apartments have been left empty while people like the young woman and her child I referred to and so many others go through a housing trauma. Could there be anything more urgent than putting human beings, like that young mother and her child, into those empty apartments? For ordinary people, it is as simple as that. It is obscene that NAMA sat on those empty apartments. It is worth saying that the Dún Laoghaire-Rathdown County Council approached NAMA and asked for the apartments but NAMA said no. The apartments are still empty while there are people like the young woman I mentioned going through hell.

It seems to me that we should set aside the very interesting debates on whether there are 180,000 empty units, as the CSO suggests, or a percentage of that figure. I do not know whether the percentage is 10%, 20% or 30%. We have to find out the correct figure, as a matter of urgency. There are no debates about probate or anything like that but there may be a debate about what conditionality should have been put on the off-loading of NAMA assets or whether NAMA assets should ever have been off-loaded in the teeth of a housing crisis like this one. Either way it is simply unconscionable that there are perfectly habitable empty units that people like the young woman and her child that I mentioned could live in. Instead, she is breaking down as a human being. The damage that has been done to her child is impossible to fathom or calculate.

Deputy Pearse Doherty has tried to inject urgency into this question, which I echo. I wish to add that it is just not good enough if the Government does not move, as a matter of absolute urgency, to ensure that not a single unit that could be inhabited by people who are at the sharp end of this appalling housing emergency has an obstacle to its usage. I urge that any obstacles to getting people housed in these empty units are removed, as a matter of urgency. Whatever measures that have to be taken and whatever taxes or penalties that have to be imposed in order to get those properties for the people who need them must be taken, and they must be taken now, because we have talked about this matter for years.

The amendment is a very modest effort. It must operate within the constraints of the Finance Bill and what we are allowed to propose. We cannot propose things that result in a charge on the Exchequer. The amendment seeks to compel the Government to do something about the obscenity of empty units sitting side by side with human misery and human tragedy. I appeal to the Minister to take the amendment on board and do something about this matter.

Chairman

The Minister has already responded. Perhaps he wants to add something else.

Deputy Paschal Donohoe

I would like to make a few points. Are the units still vacant?

Deputy Richard Boyd Barrett

Yes. I think they are the subject of a Residential Tenancies Board dispute, which is the last thing I heard about them, because the vulture fund tried to evict the rest of the tenants. That suggests the fund probably has not rented out the apartments that were vacant for the last period.

Deputy Paschal Donohoe

How many of them were there?

Deputy Richard Boyd Barrett

There were between 15 to 20 units over the three or four years, according to the residents in the Robin Hill apartments.

Deputy Paschal Donohoe

I shall respond to the different points made about my track record and the Government's general response to this matter since I have been a member of Cabinet and over the past year. What my track record, as Minister for Public Expenditure and Reform, looks like is an increase in the amount of resources available to the Department of Housing, Planning and Local Government to deal with an issue that is unacceptable to me. I want to see us, as a society, respond to the crises that have been identified by both speakers.

Amendment put:

The Committee divided: Tá, 2; Níl, 3.

Tá

Doherty, Pearse.
Murphy, Paul.

Níl

Burke, Peter.
Donohoe, Paschal.
Neville, Tom.

Amendment declared lost.

Staon: Deputy Michael McGrath and Deputy John McGuinness.

Deputy Pearse Doherty

I move amendment No. 16:

In page 20, between lines 6 and 7, to insert the following:

"13. The Minister shall, within one month of the passing of this Act, prepare and lay before Dáil Éireann a report on how he will monitor on an ongoing basis the effectiveness and the value for money of the Help to Buy scheme.".

Amendment No. 16 deals with the help-to-buy scheme. I would have expected that the Minister would have seen sense over the summer period and would have ended the help-to-buy scheme. Unfortunately, that is not the case. Instead, despite the fact that the scheme is costing in the region of €40 million per year, the Minister has extended its use. It is a supply-side problem and this scheme does nothing to deal with the supply-side pressures. Before I go into any further detail on this, I ask the Minister to outline why he believes it is appropriate to continue with the help-to-buy scheme given that there is no evidence to suggest that it is meeting the intended rationale proposed by the Minister on its introduction that it was an effort to help individuals to gather the deposits required to meet the Central Bank requirements and that it would lead to increased supply.

This amendment calls for the Minister, within one month of the passing of this Act, to provide a report on how he will monitor on an ongoing basis the effectiveness and the value for money of the help-to-buy scheme. It is my party's view that the help-to-scheme should not continue. We have opposed it from day one. It was a scheme that should never have been introduced. It was done on the insistence of the Minister but with the support, through its policy of abstentionism, of Fianna Fáil. It has literally put money into the pockets of developers and has led in no small way to the increase that we see, year-on-year, in house prices.

Deputy Paschal Donohoe

The help-to-buy initiative has been in operation since January 2017. The scheme is designed to assist first-time buyers with obtaining the deposit required to purchase or build their first home. With a view towards increasing the supply of new housing, the relief is only available in respect of new build or self-build properties.

Following its introduction in budget 2017, and as a result of debate on the issue on this Stage of the Finance Bill last year, Deputies will be aware that Indecon Economic Consultants was commissioned to undertake an assessment of the scheme. The terms of reference for this review included an examination of whether the policy objectives on the supply of new homes are being met, what impact, if any, the scheme is having on new and second-hand house prices, and what impact the scheme is having on the residential property market generally.

The review was published as part of the budget documentation on 10 October. It found that, to date, the incentive has not had a measurable effect on house prices, while it is meeting its objective of assisting first-time buyers of new homes to fund the deposit required under the Central Bank's macro-prudential rules.

The report found that the supply of new homes was increasing modestly. While the help-to-buy initiative does not appear to have had a direct impact on these supply levels to date, the report also noted it may be too early for this to have become apparent. On the basis of these findings, and considering that the incentive has only been in operation for less than a year, I decided to allow the measure to continue in its current form for the coming year, subject to it being closely monitored and with a view to taking stock again prior to budget 2019. In addition, the Revenue Commissioners publish monthly statistical reports on the cost of the help-to-buy scheme. Its reports include the numbers of claims made, approved and paid, as well as breakdowns of the figures by metrics such as property value, loan-to-value ratio, and property type. It also includes a geographical breakdown of claims by county.

My Department reviews taxation measures regularly as part of the budgetary process. Given the extensive nature of the Indecon report into the scheme, as well as the detailed statistics on the scheme published by Revenue on a monthly basis and the analyses undertaken by my own officials, I do not propose to accept this amendment.

Deputy Pearse Doherty

First of all, the Minister did not prepare a report before introducing this scheme. The Indecon report makes reference to that fact and says that it should not happen again. No evaluation was carried out. We had a big talk earlier about how homeless families could benefit, but the Minister said that he could not introduce a vacant property tax as he would need all the statistics and so on. When it comes to putting money into developers' pockets however, the Minister just announces the measure and then carries out an evaluation a year later, an evaluation which basically says that it cannot tell whether the scheme has contributed to supply. What it says is that "[t]he Help to Buy (HTB) scheme is primarily but not exclusively a demand led measure and there is legitimate concern that, in a period of inadequate supply, the measure could result in increased inflationary pressures on property prices therefore reducing any benefit in terms of mortgage affordability." That is the key issue.

What is happening out there while the Minister is messing about with this scheme and putting €40 million of taxpayers' money into developers' pockets? Let us look at the figures. There has been a 12.8% increase in property prices over the last 12 months. Does the Minister know where we are going? At this point, in November of this year, we have now exceeded the property prices of 2005. Within two years, 24 months, at the current trajectory property prices in Dublin will exceed the peak of the boom.

Let me tell the Minister what the report said again. It said that "[t]he Help to Buy (HTB) scheme is primarily but not exclusively a demand led measure and there is legitimate concern that, in a period of inadequate supply, the measure could result in increased inflationary pressures on property prices therefore reducing any benefit in terms of mortgage affordability." This is a con job. People feel good when they get this money into their pockets but when the house they are trying to buy, in Dublin for example, at €300,000 has gone up 12.8% in the last 12 months, any benefits are outstripped. These people's mortgages will now have increased by €33,000 or €34,000. To draw down €34,000 over a 30-year mortgage means one has to pay back €65,000. It is a complete and utter con job.

This is not leading to supply. The other thing which the report says is that "[t]he HTB measure does not appear to have had any significant overall impact to date on the level of supply." It has failed. The then Minister, Deputy Michael Noonan, told us that this scheme was about supply. He then told us that it was about helping people to get deposits together. Lo and behold, a couple of weeks later the Central Bank changed the rules. What does the report say? It says that "[t]here is however likely to be some purchasers who did not need the incentive suggesting an element of deadweight and particular affordability issues remain for those on lower incomes." The report tells us this. It does not give the Minister comfort to continue with this scheme. There is no evidence that this scheme is leading to supply.

As the report says, there is legitimate concern that it is causing inflationary pressures on property prices. We all know, because the statistics are there in black and white, that there is what is called deadweight in the scheme. That is to say that the vast majority of people who are availing of the help-to-buy scheme are not those who require the scheme to meet the Central Bank's deposit requirements. Why the hell is the Minister continuing with a €40 million incentive? This money goes directly into the pockets of developers. At a time when there are constraints on supply, additional money provided into the system increases pressures. Those pressures result in house prices increasing. That is why we are seeing the type of increases in house prices we have seen in recent months.

In the last year house prices in Dublin city have gone up by 13.9%. They are approximately 103% or 104% above the 2005 baseline. They are 24% off the peak prices. The Minister should remember that we are on course to return to peak property prices within two years. This is happening. What can we do to stop it? There are many things which we can do, but we can focus on this scheme for now. As the report says, "there is legitimate concern that, in a period of inadequate supply, the measure could result in increased inflationary pressures on property prices". There is no reason in the world to continue this scheme. The Minister can bluff and bluster all he wants but, as the report says, there is legitimate concern that the scheme is contributing to that 12.8% increase. Once these increases happen, it will be very difficult to reduce them again, even when supply increases.

The Minister is pricing many people in the Dublin market out of house ownership. People of my generation and younger, people in their mid-20s, are telling me that they will never aspire to own a home. It is simply beyond their reach. These are people who are living and working in Dublin. The opportunities which their parents had are no longer there. They just cannot see a way forward because of current property prices. We know where we are going. House prices are increasing more rapidly now than ever before. The help-to-buy scheme triggered some of that. The Minister is continuing with a demand-side measure while there is a serious supply issue. This does not make any sense on any level and there is nothing in the report which should tell the Minister that it does make sense at a time when house prices are increasing at the current rate and when there is inadequate supply.

I will point to one more issue, which I will come to again later as it relates to other things we must deal with in the Finance Bill. In Dublin 50% of homes are being purchased by institutions, the Irish Real Estate Fund and so on. They are outbidding first-time bidders. These homes are not being bought by first-time bidders. That is happening because in previous finance Bills the Minister incentivised those funds to snap up the very few houses which are available in Dublin and elsewhere. I am strongly arguing that the help-to-buy scheme has no merit, that it should be immediately discontinued and, at the very least, it should be monitored in respect of its effectiveness and value for money. I am putting the Minister on notice. Just as the Minister is complicit in accepting and normalising homelessness because of his failure to act on a vacant house tax and to provide sufficient resources to build social housing, he is also facilitating the dramatic increase in house prices which will prevent a generation acquiring homes in areas of this city and elsewhere throughout the country.

There is no point crying about this in a year's or in two years' time when we will all be asking how the hell we got back to peak property prices. This is what will lead us there. It will be because the Minister introduced a measure which was not thought out. He commissioned a report which is inconclusive but which says that there are legitimate concerns that the scheme is a demand-side measure which is having no impact on supply and which also says there is deadweight in the scheme. The Minister thinks that it is appropriate to continue giving €40 million away on this measure. It does not make any sense.

Deputy Paul Murphy

I support the amendment and agree with Deputy Doherty.

The Minister for Housing, Planning and Local Government, Deputy Eoghan Murphy, has said the problem of the Government's inaction in the housing crisis has nothing to do with resources, ideology or money. The difference in the Government's approach to the idea of vacant sites and the help-to-buy scheme indicates that is not accurate. Ideology has much to do with it. The resources will be found for developers but will not be found for building homes directly, which is what is needed.

Where did the help-to-buy scheme come from? Who was calling for it in advance of last year's budget? It was the Construction Industry Federation, which had it in its manifesto. It did not do so because it thought it would resolve the housing crisis but because it would benefit its members, namely, developers, who will end up with the bulk of this €40 million of public funds every year. There is no evidence to suggest this is having a positive impact in allowing people to access homes, but the Government proposes to continue to give developers €40 million a year.

Last year, when the scheme was first presented, the former Minister for Finance, Deputy Noonan, argued it would increase supply. The only way it was ever going to increase supply was by increasing prices. Accordingly, it has created a rat race for people trying to get on the housing ladder, a race they can simply never win. They can have the illusion of having access to money but house prices are going up beyond them, still remaining out of access. Then the money just gets transferred to the developers. That is what has been happening over the course of the past year. The sum of €40 million is not a small amount of money, yet the Government proposes to continue without an evidential basis. There was no evidential basis to start it in the first place, but the Construction Industry Federation called for it and the Government did it. A report was commissioned but there is still no evidential basis for it and the Government intends to continue with it. It is quite incredible and it gives lie to the fact there is not an ideology behind what the Government is engaged in. There is precisely an ideology. It is about incentivising the private sector to deliver homes by increasing prices. The consequences of this are more problems for ordinary people and an overheating of the property market.

Deputy Richard Boyd Barrett

I add my support to this amendment. The Minister said in his initial contribution that the judgment on the help-to-buy scheme would be the extent to which it did or did not contribute to a rise in house prices. The Central Statistics Office, CSO, brought out a report today which stated house prices have gone up by 12.8% in the past year. In Dublin, in the past three months, the average house price has gone up by €17,000. Clearly, any value that the Minister might even ascribe to this measure from the point of view of the home buyer is being wiped out by the spectacular rises in house prices. The only beneficiaries of this scheme are developers and builders.

In the early phases of the debate about the housing crisis, the cry of developers as to why they could not deliver the supply everybody said we needed was because it was not profitable for them. There was no doubt they wanted a dramatic rise in house prices and the Government obliged. The Government is contributing enormous sums of money through this scheme as well as through the local infrastructure housing activation fund, LIHAF, and House Building Finance Ireland, HBFI, to subsidise those who are hoarding land, manipulating prices and lobbying the Government to boost their bottom line and ensure they can make a lot of money out of the housing crisis. The Government is being dragged by the nose by these people.

There is an opportunity cost to this. Every cent the Government gives to them is money that does not go into building public housing. It is not just a debate about whether it is effective, although clearly in its own terms it is contributing to or failing to stop the spectacular rise in house prices. The other side of the coin is it is money that could be going into public housing. However, the Government continues, or in the case of HBFI and LIHAF, expands corporate welfare to the very people, the builders and developers, who landed us in this mess in the first place and who, even in the teeth of this extraordinary crisis, are still manipulating it to their own advantage. It is extraordinary.

I heard an interesting contribution at the Right2Change conference last weekend from the head of the plasterers' union about the cost of housing. Much of what we hear about the cost of building housing is actually the propaganda coming from the builders and developers. He helpfully pointed out that when one breaks down the cost of building a house, it is between soft costs and hard costs. The hard cost of building a house comes in under €200,000. To physically build a house one needs bricklayers, labourers, electricians, carpenters and the other associated trades. The other costs are the profit-taking of the developers, the estate agents, the architects, the surveyors and so on. As he simply pointed out, those costs would not exist if the local authorities were building houses because they already employ all of these people. Half of the cost of building a house goes to people in the private sector, whereas if they were built by local authorities we would only have the hard costs with most of the soft costs covered by existing local authority architects, surveyors and so forth. Accordingly, much of the profit-taking would not be necessary at all.

That is the opportunity cost of the Government's approach and its ideologically dogmatic approach of believing the market will solve it when clearly the market is the problem. Worse, the market is manipulating the situation, and yet the Government continues to feed the monster. It is inexplicable.

Deputy Michael McGrath

One of the report's recommendations is that a comprehensive cost-benefit analysis of the scheme should be undertaken after a period. Given the limited time since the measure was introduced, a report inevitably can only represent a preliminary assessment and, in short, the assessment is inconclusive and it is too early to say. The Government, to use the Taoiseach's words, is admonished for not doing an assessment in advance of introducing the scheme.

The scheme was announced in July 2016, the details were provided in the 2016 budget and it was enacted in last year's Finance Bill. Indecon only had a short window of actual data on which to base its analysis. What will the Minister do in a formal sense to ensure there is a proper assessment of the cost-benefit analysis of this scheme? The measure of success for this scheme is whether it will boost supply. Is it the Minister's view that the scheme is essential for viability to be achieved and, as Deputy Boyd Barrett said, for it to be profitable for builders to build houses in a commercial market, or is it already viable in the market, given the way prices have risen?

Deputy Joan Burton

I support this amendment.

It is important that we receive a detailed report on this matter. I opposed the scheme when the Minister's predecessor, Deputy Noonan, introduced it because it did what I forecast it would do. There is no doubt that it generated interest in the housing market, particularly among younger people who wanted to buy houses before prices started to escalate and who had, perhaps, already accumulated significant savings. In the Dublin West constituency, there are, as the Minister knows well, many houses being built. The fact is, however, that the window through which someone in the process of buying could make a gain was less than six weeks because the builders just increased the prices dramatically when the scheme was confirmed. Prices have been increasing ever since.

I appreciate that the Minister is now really caught in the cross-hairs in that it is almost impossible and extraordinarily difficult to withdraw a subsidy, particularly one relating to builders, once it is in place. The Minister should take a deep breath, however, and determine the value of the scheme at this time.

A more fundamental question arises. The attitude of the Minister for Finance is significant in this regard. Does Fine Gael envisage that this country should be one in which it is legitimate to aspire to own one's own home? There are those who spoke earlier who clearly believe that only local authorities should build houses. That is a reasonable point of view but the local authorities do not want to build and several Ministers responsible for housing, including the current one, have been trying desperately to persuade them that this is the right thing to do. For a variety of reasons, local authorities are not really engaged in building, other than in relatively small numbers and through housing associations. Bearing in mind that we all know Dublin's inner city very well, the problem with the housing association model is that the scale of activity is too small to meet the demand. The associations' activities are very good. The associations can be excellent and extremely supportive, particularly of people whose personal experience or problems affect their ability to obtain a home. If one comes through a period of homelessness, it takes time to recuperate. It can be absolutely awful for many people.

I wish to focus on affordability, which is critical in the kind of democracy and society we have. Let me use the example of a couple, perhaps in the Minister's Department, who have been working for ten to 12 years since graduating from college and who are now earning a reasonable amount of money and trying to save or, in the case of a select few, have access to the bank of mum and dad, thus allowing them to obtain some parental support. The latter is particularly the case if one is from a middle-class family. Parents may have valuable property, perhaps on the south side of Dublin. How can the couple in my example afford to buy a house, particularly if they are married and have children, or want to have children, or if they are in a long-term relationship? It is an existential question. It may also be the case for the Minister, but I am constantly involved in conversations with people who spend entire weekends looking at new and second-hand houses in the hope they can beat the escalator that is operating at present. The new home buyer's grant has driven this to an extent. The Minister's predecessor wanted to send a signal to the market, and the market got its signal. Prices were ramped up, but with no thought as to the wider social consequences.

Figures published recently show that the level of home ownership in Ireland is on a downward curve. Traditionally, most people in secure employment over a long period, be they working for the council, the Government or a private company, could aspire to buying their own homes. This trend is really under attack and the figures are sliding. My question is a fundamental one for Fine Gael, notwithstanding all its rhetoric about ownership. That figures are sliding is a dreadful comment on a Fine Gael-dominated and Fine Gael-led Government, and there is no sign that the slide has started to abate.

It is obvious, particularly in Dublin West, which is one of the largest development areas in the State and where approximately 1,000 houses are to be built at several different stages over the next three years, that land values are galloping once again. This is where there is a problem with structure and in respect of which one must consider actions one may be able to take and that certainly do not feature in the legislation. There are a number of quoted property companies. It is well worth their while, in terms of their stock market valuation, to sit on land because they are making money as they do so. The young people we all know are locked out of being able to buy, not necessarily at a cheap price but at a favourable one that would allow them to start family life and have the security of having a home. They will have very big mortgages but we know many families who, with two incomes, can actually manage in this regard.

Alongside this, there is an enormous need for social housing. I feel very sorry for the Minister's colleague, the Minister for Housing, Planning and Local Government. What capacity does he have to persuade the councils, on their own or together with housing associations, to scale up their activities in order to meet demand? At any given time in Irish society, approximately 30% of people do not have the capacity to fund the purchase of houses, either because they are in precarious or occasional employment or as a result of the fact that they simply cannot buy a site at a reasonable price if they are in a rural area and have some capacity to self-build, perhaps with family support.

I have described the model that has been in place. It was heavily ruptured by the crash and the collapse of the construction industry. I am really interested in knowing what the Minister intends to do to restart the model. There are many reports indicating that when NAMA offered apartments to local authorities, particularly South Dublin County Council and the others on the south side, they turned them down. I include the councillors in this. The apartments were turned down because, for some reason or another, a number of the areas in which they were located were not deemed to be appropriate for social or rented housing.

Irish history indicates that, for people on a good income, the rented housing model is not particularly sustainable. It is a fantasy of the people writing the property pages that everybody should be happy to rent a house as they are in Germany and northern Italy. If one rents a house in Germany or northern Italy, one can remain in it on an intergenerational basis. Therefore, one is not turfed out if one's mother or father dies, and one can sustain the rent. We really need to examine our models. Could the Minister for Finance tell us a little about how the help-to-buy scheme has helped people other than those who were involved at the very beginning?

The initiatives the Government has taken are insufficient. Many are very good, such as the allocation of funding, in which I was involved. However, it is being spent far too slowly. It is significant but I do not know what the Minister is going to do to speed up production.

Deputy Paschal Donohoe

Did any member of this committee notice that in the budget I said "No" to a lower VAT rate for the construction sector?

Deputy Pearse Doherty

It was a daft idea in the first place. I do not think members should be patting the Minister on the back for that.

Deputy Paschal Donohoe

The Deputy is well placed to make claims regarding the effect of lobbying that he knows worked in the run up to the crash in this country. The same types of calls were made prior to this budget and I said "No". The members accusing me of having some kind of agenda to up the margin and profitability of developers at the expense of trying to help people buy a home are either not aware of or are choosing not to bring up the fact that when I was confronted with demands for the kind of policy choice that could realise that kind of agenda, I said I was not going to do it. I did that because I will not bring in measures that artificially increase the profitability of some parts of our economy at the expense of genuine measures that can increase supply. Colleagues who have centred their claims regarding what I am or am not doing on the anchor that I have some kind of agenda of trying to support parts of the construction sector at the expense of increasing supply should look at the decision I made in that instance when I said I would not do it. The reason for that was because I had no guarantee or credible assurance that it was going to increase supply, nor had I any ability to withdraw the measure if it were to be put in place and to then deal with all the difficulties that would cause, as Deputy Burton touched on a moment ago. I knew there was a risk that if I put such a measure in place there would be no certainty of an increase in supply and no way of telling what could happen at some point in the future at huge cost to the taxpayer. Deputies Doherty and Murphy have made all kinds of assertions about my rationale behind this measure and what I am doing but they should go back to what I decided not to do in the face of the kind of claims and arguments that won at other points in our past when this type of issue was being dealt with.

I wish to address the report, what I am doing and the policy choice I have made, which is to maintain it. I will deal with Deputy McGrath's question regarding how I will evaluate it in a moment. The scheme is, as all members know, capped at or below a point just under €500,000. According to the figures published in the report I made available as part of the budget documentation, 53% of claims or draw down under the scheme are for properties priced at or below €300,000. A little more than 82% of claims are for properties valued at below €375,000. The drawdown under the scheme is going towards properties we are trying to change the pricing of in order to make them more affordable for our citizens. The figures I have shared with Deputies show that, for example, 36% of claims were for properties costing between €226,000 and €300,000. That shows the scheme in its short history has been concentrated on the kind of pricing levels I want to influence and it could have the possibility to continue that in the future.

What is the central reason I have decided to maintain this scheme for another year? I refer members to the words of the former Minister for Finance, Deputy Noonan, when he said that he wanted to have a scheme in place to try to increase supply. Given the nature of the market I am engaging with, all members know it would take longer than 12 months or, indeed, the eight to nine months the scheme has been in operation to know if a measure to increase the supply of a particular asset, in this case housing, with all the difficulties and requirements involved in the planning process, tendering and so on, is going to have a supply side effect. It will take longer than that. However, those are the price ranges against which claims have been made during the operation of the scheme. As regards the assertion that the scheme has caused the kind of price inflation we are currently experiencing, 4,487 people, families or couples have accessed the scheme to date. That is not enough for anybody to make the claim that the scheme is shifting the needle in terms of pricing levels. What is more likely, as, in fairness, some members have acknowledged, is that the shortage in the supply of housing is affecting the pricing levels that I want to be moderated and move into line with people's ability to afford to buy a home. Deputy Burton asked a question on that issue.

Deputy Doherty made the point that I am complicit in trying to normalise issues he believes are unacceptable. As I have said, I want to tackle and make progress in dealing with homelessness to a greater level than we are at the moment, and deal with social issues that are unacceptable. I hope that one of these days when the Deputy is accusing me of normalising things that I also want to change, he might acknowledge the good things that are happening in the economy in terms of job growth, changes in living standards for some people and improved investment in public services and that I have played a role in those changes. He is entitled to the view that there are issues with which I am not dealing correctly and I would never differ with his right to hold that opinion. However, if he believes there are policy choices I am making that are contributing to difficulties, as he does, I hope he would at least have the ability to acknowledge that it is likely there are other policy choices I am making that are contributing to improvements in our economy and society. There is a strong case for that but I acknowledge Deputy Doherty is not willing to concede that point. He has accused me of being complicit with developers and in their back pocket. I have pointed to a decision I refused to make as comprehensive evidence that I am not. Just because I have a different view to the Deputy on a matter does not mean it is bluff and bluster. I do not accuse him of that. I have laid out my argument and the facts available to me to back up my case.

Deputy Murphy made reference to a CIF report and the lobbying therein. He might also acknowledge that I did not implement the main measure the CIF and others were looking for in the budget. I have pointed to the effect of the scheme on particular price levels. If this is a supply side measure it is going to take longer than six to nine months to evaluate whether it is having a supply side response. That is the basis upon which I will evaluate the scheme in the run up to budget 2019.

Deputy Boyd Barrett holds the view, and it is a legitimate and consistent one, that the State should be building nearly all the houses our citizens need. His view is that the private sector is not capable of doing that at pricing levels he believes are affordable for the citizens we represent. I take a different view. I believe the State should play a significant role in respect of the supply and regulation of houses, which is why a policy shift to local authorities building homes as opposed to acquiring them is the right policy decision to make.

I also believe many of our citizens want to own the assets they are going to buy. The private sector does have a role to play in regard to the supply of homes and the State and its institutions have a role to play in regulating that market and in ensuring it is not developed at the expense of the common good.

Deputy Michael McGrath asked how I propose to deal with this issue in the run up to the next budget. By the time I get to the next budget I will have more evidence to help me understand whether this scheme is leading to a supply side response. This will be one of the key factors in regard to the retention of the scheme. I refer the Deputies to table 71 of the Indecon report, which shows that 22% of the people surveyed in the context of this report, when asked whether this scheme was likely to incentivise more units over the next three years, responded No. The remaining 78% responded Yes. It is, therefore, reasonable for me to wait to see if a supply side response is forthcoming in advance of budget 2019.

Deputy Burton asked for my views on housing ownership. I want to have a housing market in which more of our citizens than is currently the case are able to afford to buy homes, where home ownership is a realisable objective for the majority of our citizens and where those who wish to rent, as is the case in other European markets, are able to rent in a more stable and diverse rental sector than is currently the case. For those citizens who are not able to do either, the Government, through the local authorities, should be building homes. We have increased the resources available to local authorities to enable them to do that. The Deputy made an interesting point regarding whether local authorities are accessing that funding, which is a matter I am tracking. My experience in the past has been that they have not not been doing so. However, as indicated as recently as this week this year the local authorities will be drawing down the funding available to them in a way that we have not seen heretofore.

Deputy Pearse Doherty

The Minister said that I did not acknowledge the positive decisions he has taken. He is wrong. I have acknowledged them. I have supported many of the measures brought forward by him in this Bill, some of which I referred to when I was addressing this issue, particularly the previous measure we discussed in terms of the write-off around returning vacant homes into stock. It is unfair of the Minister to suggest that I have not acknowledged some of the positive measures he has introduced. That said, as Minister for Finance and a member of the Cabinet he is responsible, collectively and personally, for the decisions he has taken that have created a homelessness and housing crisis and resulted in house prices escalating at a dramatic rate. I am hearing nothing from the Minister in terms of plans to stop this worsening.

This time last year we heard from the Central Statistics Office, CSO, that house prices had increased by 8% year-on-year. Since then house prices year-on-year have increased by 12%, which is a 50% increase. This equates to an increase of approximately €3,000 to €4,000 per month in the value of the properties, which is putting the purchase of a home beyond the reach of many people. Taking account of current trends property prices will reach peak point in the next two years. This means that at that time house prices in Dublin will be the same as they were in February 2007. How are we going to deal with that? Even if house prices do not hit peak they will still be over-valued. A four bedroom semi-detached house in Dublin costs €440,000. A 12% increase will put that house beyond the help-to-buy scheme because it will be close to or exceed the €500,000 threshold. This is where property prices are now.

The Minister mentioned the issue of the VAT reduction and I responded that it was a daft idea. It was a daft idea. I do not think the Construction Industry Federation, CIF, is daft. It knows exactly what it is doing. Of course, it would have bagged the VAT reduction if it had been agreed. What the CIF did in this regard was a lobbying ploy. It raised the issue at a time when the Minister was reviewing the help-to-buy scheme. When the CIF engaged with the Department of Finance last year the first item on its agenda was the help-to-buy scheme. Because of public pressure and because every economist worth his or her salt is saying the help-to-buy scheme is not working and it is contributing to house price inflation there was speculation that it would be abolished or significantly changed. The response of the CIF was to make an even bigger demand - a daft demand in my view - that it knew would never be realised and Fianna Fáil rowed in behind it, as it has traditionally done in terms of the construction sector. The CIF put a little political pressure on in relation to a demand it did not believe it would get to ensure the first item on its agenda, the help-to-buy scheme, was secure and lo and behold the Minister fell for it hook, line and sinker. When it comes to negotiations one creates demands, all of which one does not expect to be met but help to secure one's main demand. This is as old as day itself. That is what happened. Does the Minister genuinely believe we should be patting him on the back for not giving in to the CIF demand for a VAT rebate? Does he not know he was played? He mentioned he did not agree to it because he could not guarantee it would lead to an increase in supply. He also cannot guarantee the help-to-buy scheme will lead to an increase in supply. I am not the only one saying that: it is also stated in the report. The Minister said that the withdrawal of the VAT scheme would cause problems. The withdrawal of the help-to-buy scheme will also cause problems. The Minister also said that he cannot measure the affect of increases in supply from the VAT rebate because of the lead-in period. The same applies in respect of the help-to-buy scheme. It is due to expire at the end of 2019.

There is no reason this scheme continues. The Minister stated that draw-down is in the region of €300,000. This scheme is available not only in Dublin but across the country. House prices in the west are increasing at a higher rate than in they are in Dublin. House prices in the north west are increasing at a lower rate but still above the 10% rate but those house prices are not at the €400,000 mark. Average house prices in many of those counties are €180,000 or €190,000. The fact that houses eligible under the scheme are in the region of €226,000 to €300,000 means nothing unless the Minister can say that without the scheme house prices would have been cheaper. He cannot say that. It is not possible for him to do so. The help-to-buy scheme does only one thing. I am not saying that the Minister personally is putting money into the pockets of developers. Rather than saying something behind the Minister's back I will say it to his face. This scheme puts money into the pockets of developers. We are supposed to scrutinise measures in terms of their effectiveness. In terms of effectiveness and the help-to-buy scheme the State is transferring valuable resources that could be diverted elsewhere to persons who are purchasing houses but those properties, if in the capital city, are increasing at a rate of €3,000 to €4,000 per month or €30,000 per year, such that benefit of the scheme is lost to them and that money ends up in the property developer's back pocket. The Minister's only argument for the continuation of this scheme is that he did not give in to the developers on the VAT reduction. I thought that the Minister knew what was going on in that regard. I probably believe that the Minister did know what the CIF was doing. I encourage the Minister to talk to people becuase everybody knows what the game plan was in terms of the VAT reduction.

If the Minister for Finance thinks that they were the big guys standing up to the construction sector in this, I am sorry to inform him that he was played on it because the construction sector got exactly what it wanted. The sector got the help-to-buy scheme continued for two years at a time when the Government was wobbling and, from the soundings coming out, it was possibly going to end the scheme or significantly restructure it.

Chairman

Is the amendment being pressed?

Deputy Pearse Doherty

Yes.

Deputy Michael McGrath

I would like to add something.

Chairman

I ask Deputy McGrath to be brief as everyone has said their piece.

Deputy Michael McGrath

The Minister did not answer my direct question about a cost-benefit analysis. It is recommended in the Indecon report that one be carried out after a period of time. The consultants made the point that they were only able to make a very preliminary assessment. The Minister has said that he will take into account the data and that he will be in a better position in advance of the next budget. How will that happen and what will the Minister base it on? Will the Minister commit to doing the detailed cost-benefit analysis that was requested?

Indecon made the point, and I agree with it strongly, that the key challenge for the housing market is to reduce the cost of housing, including house prices and the costs of construction. I do not see any effort being made by the Government to tackle that issue to bring down the actual costs of delivering homes. Perhaps the Minister will comment on that.

Goodbody forwarded an analysis by email just a few minutes ago. The issue of the escalating prices is accelerating. Goodbody makes the point that following the strong monthly growth seen in July and August, prices have risen at an annualised pace of 27% in the most recent three month period. Goodbody is raising its outlook for growth in 2017, with an increase from a forecast of 12.5% up to 15% now looking a reasonable prospect. It is actually getting worse and is accelerating. I am not blaming the help-to-buy scheme for all of that, and nor is Goodbody in its assessment, but the key question is what the Government is doing to bring down the cost of delivering homes. There is general agreement that supply is the main issue, but costs and prices are rising, and home ownership is going beyond the reach of more and more people as time goes on. These are the key issues the Minister needs to focus on.

Deputy Richard Boyd Barrett

Setting aside any questioning of the Minister's motives or agendas around builders, and I do not believe that he is in any way acting as a representative of those sectors, the measure is not working on its own terms. That is the point. Alternatively, the money could be put where it could contribute to resolving a disastrous situation. This is the essence. Any benefit to the buyer is being wiped out by the spectacular growth in property prices. The beneficiary of those increases in prices are builders and developers. There is absolutely no question that they are the beneficiaries and are making money out of this.

As prices go up, arguably an incentive such as this or assistance for the home buyer is also encouraging them to get into an unsustainable market. Let us remember what happened the last time. People are being encouraged to buy houses at unsustainable prices where mortgages are gargantuan and the burden they will carry will be disastrous if further done the line we have another crash. From any point of view, it seems that this is not working. Contrast this with where the funding could be diverted. This situation is not just about this particular incentive. The package of this scheme, involving the local infrastructure housing activation fund, LIHAF, home building finance Ireland, HBFI, leasing, and the housing assistance payment, HAP, are all reliant on the private sector and the market to deliver. I have just done a quick tot and of the €1.83 billion in the budget, about €1 billion is going to the market in various ways to try to get the market to solve the problem. This is a disastrous strategy.

The Minister said that in putting an alternative, our proposal is that only the State should build public housing. Deputy Burton implied that some of us are arguing for that, but that is not what we are arguing. We do, however, argue that there needs to be seismic shift back in that direction. The story of the past 25 or 30 years was that the proportion of housing built by the State has dropped to negligible levels. If, as Deputy Burton has rightly said, some 30% of people cannot purchase housing at market prices through their own resources, what does this mean? It means the State should provide 30% of the housing. There is no plan for that in what the Minister is doing but it is what we should be aiming at. This is what the State used to do back in the 1930s, the 1940s and the 1950s. The State built that proportion of the housing stock. The vast majority of the moneys being allocated by the Minister to resolve the problem in one scheme or another are going to the market to try to encourage and incentivise it. I accept that the Government in Rebuilding Ireland has somewhat and in a small way shifted, although mostly at the level of rhetoric, to saying that Ireland needs public housing. Rebuilding Ireland is still relying overwhelmingly on the market and I do not believe it can deliver. In so far as it may increase supply, it is going to do so at unaffordable prices.

We need a dramatic shift in where the State puts its resources. Let the market look after the market. People who want to purchase their own homes, and I accept that it is the majority, are not able to purchase now because the prices in the market have gone out of control. They would also benefit. I underline this point, particularly given the offensive rhetoric from the Taoiseach, Deputy Varadkar - not from the Minister for Finance in fairness - about "free housing". The implication was that social housing is free. Social housing is not free. People pay rent according to their income. The point is that a person can get a house and pay according to his or her ability. The Taoiseach's comments about "free housing" suggest that those people who want council housing or who advocate for social housing are advocating free housing, as against people who pay for their housing. That is absolutely offensive. It indicates a certain mindset, which needs to shift. I do not believe that the Minister for Finance, Deputy Donohoe shares that mindset, but I believe that he shares the ideological blinkers that have been put on governments because of the shift towards neoliberal thinking that has dominated for the past 25 to 30 years. I urge the Minister for Finance to take off those blinkers and recognise that the only way Ireland can provide affordable housing is to get back up to 30% of housing being built directly by the State. This would also stabilise, or bring down, house prices in the private market.

If the Government wants to bring prices down for the ordinary home buyer, it should build more council houses. That is how it could stabilise the market. When we give more and more incentives to developers to solve the problem, they will just use them, manipulate them and profiteer from them. They will land hoard and release supply only when it suits them and they can make money. They will stop the supply when they think it does not suit and when they cannot make enough money. This is our point. The signs are on it when we consider the experience of the past ten years, or even what has happened in the past year or two. This is what is happening. The Minister should consider taking on board the points we are making.

Deputy Joan Burton

The Minister has to face the facts. The housing market is beginning to expand and a significant number of houses are being built, particularly in my constituency, but it is not enough.

They are nowhere near the numbers required. That applies to councils which are building, organisations which are building houses for rent and the private sector.

Notwithstanding all of the money being pumped in which ought to be sufficient to address the crisis, there is a failure of market regulation. I would be the first to acknowledge that regulating the building market is intensely difficult. It means dealing with very diverse individuals and much of the market is still only recovering from the crash, particularly for smaller and medium-sized builders. We are talking about the perfect storm. The industry is not even bothering to train apprentices. In three years we will be crying out to have people brought here from other countries to build the houses we will still need. The actions taken are not near adequate. In that context, the proposed amendment is extremely modest. It would provide for ongoing reporting on effectiveness and value for money achieved and the manner in which they will be monitored. The Minister for Finance has a key power when it comes to oversight and monitoring. I draw his attention to one element of the market that is causing huge problems in Dublin. Because of the extraordinary increase in the price of housing land, for those involved in the provision of finance capital through companies on the Stock Exchange, bank investment or other investment vehicles, it is highly profitable to sit on land and do nothing. That is not acceptable. We know that there are delays in providing road and bridge access and so on. However, there are also people who are consciously sitting on land and because of this the pace of development is being slowed down. The value of so many portfolios is being elevated by the surge in land values and house prices. The Minister really does have to act. I support the amendment-----

Chairman

Let me interrupt the Deputy. We had agreed to suspend the sitting at 1 p.m. and it is my intention to have the division before we do so.

Deputy Joan Burton

That is fine.

Chairman

I ask the Deputy to conclude as soon as possible-----

Deputy Joan Burton

I actually had indicated before the previous speaker.

Chairman

The Deputy was called in line with those who had indicated.

Deputy Joan Burton

I think I had indicated beforehand.

Chairman

I think differently and call-----

Deputy Joan Burton

I will finish with two sentences. The Minister knows these sites as well as I do. They include O'Devaney Gardens and Dominick Street. What is to happen in the provision of affordable housing in O'Devaney Gardens? The council may finally move to provide some social housing. The site has now been idle for 12 years or more. The position is the same in the case of the site on Dominick Street. These are prime sites that it would be wonderful to have in any city. It is really due to market failure if we cannot move on these sites.

Amendment put:

The Committee divided: Tá, 3; Níl, 3.

Tá

Burton, Joan.
Doherty, Pearse.
Murphy, Paul.

Níl

Burke, Peter.
Donohoe, Paschal.
Neville, Tom.

Amendment declared lost.

Staon: Deputy Michael McGrath and Deputy John McGuinness.

Chairman

For the information of the committee, two members abstained in the vote.

Sitting suspended at 1.15 p.m. and resumed at 2.30 p.m.

Chairman

I welcome Minister of State at the Department of Finance, Deputy D'Arcy.

Section 13 agreed to.

NEW SECTIONS

Deputy Michael D'Arcy

I move amendment No. 17:

In page 20, after line 38, to insert the following:

"Amendment of section 664 of Principal Act (relief for certain income from leasing of farm land)

14. (1) Section 664 of the Principal Act is amended—

(a) in subsections (1) and (7), by substituting "EU Basic Payment Scheme" for "EU Single Payment Scheme", and

(b) in subsection (8), by substituting the following for paragraphs (a) and (b):

"(a) a qualifying lessee of the lease (in this paragraph referred to as the ‘first mentioned lease’), or a person connected with that qualifying lessee of the first mentioned lease, is a qualifying lessor of another qualifying lease (in this paragraph referred to as the ‘second mentioned lease’) where the qualifying lessor of the first mentioned lease is a qualifying lessee of the second mentioned lease,

(b) a qualifying lessee of the lease (in this paragraph referred to as the ‘first mentioned lease’) is a qualifying lessor of another qualifying lease (in this paragraph referred to as the ‘second mentioned lease’) where that qualifying lessor of the first mentioned lease, or a person connected with that qualifying lessor, is a qualifying lessee of the second mentioned lease, or".

(2) Subsection (1)(b) shall come into operation on 2 November 2017.".

This amendment deals with a drafting error in relation to anti-avoidance provisions which were inserted into section 664 of the Finance Act 2015. Section 664 provides for the tax free receipt of rental income from certain long-term qualifying leases of farm land. The previous anti-avoidance provisions were inserted to prevent the exploitation of the provision by persons entering into cross leases of land in order to both generate tax free income and an allowable deduction. It has come to my attention that a drafting error was included in the Finance Act 2015, a measure which may render the anti-avoidance provision inoperable. The purpose of this amendment is therefore to rectify this error. The words "lessor" and "Lessee" in section 664(8)(a) and (b) were transposed. This amendment swaps them back to where they should be.

An additional technical amendment is also included to update terminology used in section 664 to reflect the EU basic payment scheme, which has replaced the EU single payment scheme since the start of 2015.

Amendment agreed to.

Deputy Michael D'Arcy

I move amendment No. 18:

"Amendment of Part 16 of Principal Act (income tax relief for investment in corporate trades - employment and investment incentive and seed capital scheme)

15. (1) Section 488 of the Principal Act is amended, in the definition of "associate", by deleting ", except that the reference in paragraph (b) of that subsection to any relative of a participator shall be excluded from such meaning".

(2) Section 492 of the Principal Act is amended—

(a) in subsection (4)—

(i) by substituting "if the individual, or an associate of the individual," for "if he or she", and

(ii) by substituting "to acquire any of" for "to acquire more than 30 per cent of",

(b) in subsection (6)(a)—

(i) by substituting "if the individual, or an associate of the individual," for "if he or she", and

(ii) by substituting "to receive any of" for "to receive more than 30 per cent of", and

"(8) For the purposes of subsections (4) and (6)(a), no account shall be

taken of—

(a) shares in the company concerned which are held by the individual

concerned where—

(i) that individual was entitled to relief under this Part in respect of the acquisition of those shares, and

(ii) that individual, or a person connected with that individual, does not at any time in the specified period control (within the meaning of section 432) the company concerned, or

(b) shares subscribed for upon the formation of the company concerned where—

(i) the company has issued no shares other than those subscribed for on formation, and

(ii) the company has not yet commenced carrying on, or made preparations for the carrying on of, any trade or business.".

It became obvious to Revenue that there was an issue.

The Revenue Commissioners contacted the Department of Finance. The matter has been rectified, and the Revenue Commissioners were informed immediately.

Deputy Pearse Doherty

When did Revenue contact the Department of Finance about this?

Deputy Michael D'Arcy

Contact was made within the last month.

Deputy Pearse Doherty

Thank you.

Deputy Michael McGrath

I wish to ask the Minister of State about the nature of the review that has now been carried out, which the Minister for Finance, Deputy Paschal Donohoe, said in his press statement would be completed in the first half of next year, so that any changes can be brought forward in the following budget. Is the review linked to this issue being identified? In the interim period, will the scheme continue as normal, with the changes that are being made? Is there a connection between what has been discovered and the need for an overall review?

Deputy Michael D'Arcy

The scheme will continue as is, with this alteration. A review was to be conducted anyway, so it is quite timely.

Amendment agreed to.

Sections 14 and 15 agreed to.

SECTION 16

Chairman: Amendments Nos. 19 and 20 are related and may be taken together.

Deputy Michael D'Arcy

I move amendment No. 19:

In page 23, between lines 15 and 16, to insert the following:

“(II) by deleting paragraph (a) of the definition of “IREF excluded profits”,”.

These amendments relate to the taxation of profits arising on the disposal of Irish land that has been held by an Irish real estate fund for more than five years. This proposal will remove that five-year exemption. This amendment provides that exemption will apply to the profits arising on land disposed of prior to 1 January 2019. Distributions out of the profits of such deposit disposals after that will be subject to the normal Irish real estate fund, IREF, withholding tax rules.

Given the changes I am making elsewhere in the Finance Bill 2017 on capital gains tax and stamp duty, I felt it was important that these provisions were also amended for consistency. In applying this provision from the start of 2019, I am ensuring that this change is introduced in a timely way while avoiding any undue disruption. I commend the amendment to the committee. I would also like to flag the possibility of a further amendment on the IREF provisions on Report Stage.

Deputy Paul Murphy

I agree with the amendments. Does the Minister of State now agree that the tax break for properties held for at least five years should not have been included in the Finance Bill 2016? At the time it was objected to by ourselves, and possibly others, on the grounds that it encourages property hoarding as well as being a big tax break. Is there an admission that that was a mistake - not a mistake accidentally made, not a drafting error, but a mistake of policy?

Deputy Michael D'Arcy

All I can do is deal with what is in front of me on this occasion. With the movements in capital gains tax and stamp duty, and the attempts to ensure that more land is made available for development for building, circumstances change. Circumstances arise depending on what has happened in the previous 12 months. We are not satisfied with the quantity of land that has been made available or the quantity of building that has happened in the last 12 months, and we feel this is a better system structure for the coming year.

Deputy Pearse Doherty

In the last 12 months there have been no major changes to the fact that land is not being released. I say that because it is important to get to the core of this. This was the major argument in the Finance Bill last year. The Minister of State should look over the transcripts. We kept going back over this on Committee and Report Stages. We argued with the Government at the time that the five-year exemption from dividend withholding tax was a loophole that it was deliberately putting into the Finance Bill. I argued very strongly that people who bought properties not just last year, but four years from then, could have no dividend withholding tax from the capital gains tax, CGT, payable. This was a major issue.

Following up on that through a freedom of information request, I found that officials were communicating the fact that this could lead to hoarding before this measure was introduced to the Finance Bill and signed off. We were unaware that there were those concerns within the Department, but we were still making the argument that this would lead to an escape from huge amounts of tax and have an effect on the property market.

I put forward the idea in the first place for a dividend witholding tax and I have campaigned vigorously to end the five-year CGT exemption, which is an incentive that makes it more profitable for funds to hold onto vacant lands for a period of five years than to sell them off. The reason it is more profitable is that the Government argued black and blue with me, and with others in this committee, that that was the right thing to do.

It is not about circumstances, CGT, stamp duty and all the rest. The Government got this seriously wrong. There was a bit of arrogance last year on this issue. The Government would not listen to members of the Opposition who were pointing out the problems there at that time. I welcome the fact the five-year CGT exemption or the dividend witholding tax exemption is going to be gone. However, there is a lesson here. We can talk about new politics and all the rest. It is not a case of saying that we were right and the Government was wrong; this has caused damage at this point. There are properties that could have been sold in bloc format, the way properties were sold by NAMA to investors, that have not been sold. This is because it was more beneficial for them to hold on and avail of the five-year CGT exemption. Those properties are in this city. This is something the Government was aware of during that time, but it continued to march on with this ill-conceived idea.

Let us deal with the practicalities. The Minister of State can correct me if I am wrong. His assistance will help the committee to understand the provision.

Therefore, one cannot get the exemption at this point in time. By the end of December 2018, however, five years will have elapsed so one will get the exemption. That means the provision incentivises the investor to sit on the vacant land, to do nothing with it even though we are in the middle of a housing crisis and hold it for another year because it is of major financial benefit to the owner and its shareholders, due to a 20% exemption on the dividend withholding tax on the gains that are realised on the property. Let us remember this is property that was bought by investors in 2013. Can the Minister of State tell me the uplift in property prices from 2013 to 2017? There has been a dramatic increase in prices. This is why there is now a huge incentive for these companies to stash land.

That is if they reinvest the profits within the fund but that is not what is happening here. The Government would not be closing this loophole if that was the case. The Government is closing the loophole because it knows fine well that it engineered a loophole into the Finance Bill last year that incentivised people to hoard land and property. I welcome the fact that the loophole is being closed but I am disappointed that it will continue for a year.

Deputy Michael D'Arcy

What I said to the Deputy is correct. In the main the gains are re-invested. That is what property developers and property investment funds do. I take the Deputy's point that one can take a section of land out, use it in isolation and the exemption applies. He is correct to say so. We believe what we are doing is the right thing to do. We can go back and rehash and reargue last year's budget, if the Deputy so wishes. We think that our provision is the best way to deal with the matter.

Deputy Michael D'Arcy

Deputy Pearse Doherty said that 2013 was the bottom of the trough, and it was. I remind him that we needed foreign equity to come in to try to move the property market. The Deputy should not ignore where we were back then. He is simply taking the negative and suggesting that everything was perfect. We needed foreign funds to come in to the Irish residential property sector and the commercial real estate sector. Many of those companies have come in. They are building all over this city and throughout the remainder of the country. Deputy Pearse Doherty should not ignore that.

Deputy Pearse Doherty

So, we should facilitate them to do it tax-free. Is that what the Minister of State is arguing?

Deputy Michael D'Arcy

No. We have decided to change the structure – Deputy Pearse Doherty agrees with that. We have decided that, as a result of providing tax certainty, the measures will kick in 14 months from now. We believe it is important for a jurisdiction to have tax certainty. This means we should not change an aspect of the policy in one budget and then alter it subsequently. We do not believe that is good tax business. I hear what the Deputy is saying. The Irish property market has been chaotic. We believe this is the right thing to do now. We believe that January 2019 is the right period for this to kick in.

Deputy Pearse Doherty

Let us suppose a fund bought massive amounts of land from NAMA during January 2013. Can the Minister of State at the Department of Finance explain why it would decide to dispose of that land now, when the Government is indicating, through the Finance Bill, that if it holds on to the land for another 12 months, it will not pay the 20% dividend withholding tax on the gains relating to it? Does the Minister of State not understand that if I represented the fund and he were speaking to me, the policy is encouraging me, if I have the interests of my shareholders at heart, to hold on to this land for a further 12 months? We hear all the words from Ministers and the Taoiseach on the floor of the Dáil when they are doing soundings and so on about the property crisis. However, this is what it boils down to: the Government is engineering into the Finance Bill an incentive to hoard land.

The Government cannot have it both ways. I want the Minister of State to acknowledge that he is doing this with his eyes wide open. If the Government wants to push ahead with it, that is fair enough – I cannot stop him. We are not strong enough or well represented enough in this committee to do so. However, it is my responsibility to at least ensure that the Minister for Finance and the members of the committee who vote for, against or abstain in respect of this measure understand the exact consequences of it.

Deputy Richard Boyd Barrett

Deputy Pearse Doherty

That may be so but we are not dealing with pension funds here.

Deputy Michael D'Arcy

No, we are. These are institutional investors.

I want to say to Deputy Boyd Barrett that it is very easy to look back several years later and say we knew the market had bottomed out at that stage. Any members who were on the finance committee at that time, as some of those present were, know that we did not know the market was not going to continue falling. The Deputy said it could only have gone one way. The market could have continued falling and the Deputy should remember that.

Deputy Pearse Doherty

The Minister of State has made a great argument for vulture funds and why they were needed and he has taken lines from the hymn book of the former Minister, Deputy Noonan, about the role played by vulture funds and the ecosystem and so on. Many members have a different experience. We should remember that many of the vulture funds in question have no plans to reinvest here and are in it for the short term. A well-known maxim is that when there is blood spilled on the floor, it is time to go in. That is what happened here. The quantum of money we would lose in tax is a scandal, as is the fact this is holding up potential housing development at a time of emergency in that area. However, that should be considered in light of what the funds have been achieving over that period of time. Funds that invested in the period around 2013 will now benefit from the CGT exemption. In 2014, commercial property returns in the State were the highest in the world. There was a return of 40.1% on commercial property in 2014 because in 2012 the economy started to pick up and in 2013, it was already back on a growth trajectory. That is why I say it was close to the bottom of the trough. The Minister of State has said we needed the funds and all the rest and nobody knew what way it was going to go. He should read any academic analysis of the situation such as that of Morgan Kelly or the NAMA report that led to its establishment and which foresaw property prices getting back to a sustainable level within ten years. That was all well signalled and the funds knew that.

We can argue about whether we needed them. I am not sure what benefit they supplied. They snapped up properties from NAMA at rock bottom prices and made massive profits running to billions of euro on them. They paid no taxes on those profits and the Government is now going to facilitate them further in paying no tax on profits. Can the Minister of State tell me or anybody listening to these proceedings why the State needed them? What benefit did they give the State? The only benefit is their shareholders became extremely rich. The companies that serviced the funds' legal structures got quite wealthy. However, the funds did not service the interests of the State. Perhaps the Minister of State will explain how Irish citizens benefitted from vulture funds coming in and buying from the State, through NAMA, at rock bottom prices, flipping those properties within a short period of time for, in some cases, double, triple or quadruple the price for which they bought them and in other cases holding the assets in order that they can leave Ireland without paying tax. How did the State benefit from that?

Chairman

I will allow Deputies Burton and Michael McGrath to come in on this issue before I call the Minister of State to reply.

Deputy Joan Burton

I apologise for my absence. I was attending another meeting. It might be helpful if the Minister of State could give us a detailed note on this issue. To be honest, this information is extremely complex. I heard him say that this is an amalgam of different types of funds. The fact is that we do not have the analysis we need. I would say we need a very detailed note on this matter. Some of the explanations are making it more rather than less complicated. When the Minister for Finance introduced the budget, he said he would bring forward amendments on Committee Stage relating to the five-year capital gains tax exemptions for the IREFs. We have not heard an explanation of why that should be renewed. For how long will it be renewed? What is the context for its renewal? What kinds of investments are we talking about? I need to have some of that information. When the Minister, Deputy Donohoe, said on budget day that he was going to introduce this measure, he flagged that we would be given explanations and details. I think we need them now.

Deputy Michael McGrath

As it may be relevant to what we are discussing, I would like the Minister of State to tell us what further amendments are under consideration in the context of IREFs. He indicated in his opening remarks on this amendment that the potential exists for other amendments to be introduced on Report Stage. I would like to know the thinking on those amendments because it is relevant to what we are discussing now. Have the windows for first returns in respect of IREFs passed at this stage? I think the relevant dates were in January and July. IREFs have had a legal basis since January 2017. Were there returns in July? Do we have data on the withholding tax and so on? If concerns regarding the hoarding of land have led to this policy change, can the Minister of State explain what purpose will be served by providing for a delay of a further year?

Deputy Joan Burton

I would like to make a supplementary remark. Before lunch I raised with the Minister, Deputy Donohoe, the fact that increases in land values are giving people involved in funds a perverse incentive to sit on lands while such increases continue. I am sure the Minister of State is aware of this problem, which is being discussed widely. Regardless of whether we are ultimately talking about fund valuations or something like a limited company - I appreciate that different structures are involved - there continues to be a perverse incentive to make gains and see valuations rise by sitting on lands. I have significant concerns about the current tendency of various entities to sit on land at a time of remarkable speculation in land prompted by substantial increases in property values. At a time of severe housing shortages - I refer not only to affordable and social housing but also to houses for purchase - this country cannot afford to have people hoarding and sitting on land for the purpose of accumulating valuation increases.

Deputy Richard Boyd Barrett

Deputy Michael D'Arcy

I will provide the note.

The select committee went into private session at 3.35 p.m. and resumed at 4 p.m.

Deputy Peter Burke took the Chair.

We have had extensive discussion on the amendment.

Amendment put and declared carried.

Deputy Michael D'Arcy

I move amendment No. 20:

In page 29, to delete line 2 and substitute the following:

“(3) (a) Subsection (1)(a)(i)(II) shall apply to disposals occurring on or after 1 January 2019.

(b) Subject to paragraph (a), this section shall apply to IREF taxable events occurring on or after 19 October 2017.”.

Amendment put:

The Committee divided: Tá, 4; Níl, 3.

Tá

Burke, Peter.
Donohoe, Paschal.
Fitzpatrick, Peter.
McGrath, Michael.

Níl

Burton, Joan.
Doherty, Pearse.
Murphy, Paul.

Amendment declared carried.

Section 16, as amended, agreed to.

NEW SECTIONS

Deputy Michael McGrath

I move amendment No. 21:

In page 29, between lines 2 and 3, to insert the following:

"Income volatility for the farming sector

17. The Minister shall within 3 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the feasibility of introducing further tax provisions and stabilisation tools to deal with income volatility for farm enterprises both in terms of income tax and corporation tax.".

The Minister of State, Deputy D'Arcy, will be quite familiar with this issue of income volatility in the farming sector, an important issue for farmers throughout the country. There is very significant income volatility and in recent years, there have been improvements in the taxation environment to deal with it. In particular, the income averaging system was an important reform. Last year, the opt-out provisions for one year were also a very significant help.

Problems persist, as the Minister of State, Deputy D'Arcy, will be aware. Farmer organisations put forward a number of different options to provide for greater stabilisation in respect of income volatility. I have looked at a number of them. I am sure the Department engaged and considered them as well. In that regard, the purpose of putting down this amendment is to call for a report examining the feasibility of introducing further provisions to deal with the issue of income volatility for farm enterprises.

Deputy Michael D'Arcy

I think I am the only farmer in the room. I may know a little bit more. I fully recognise that farm income volatility can be a prevalent feature of the agricultural sector. In response to this, a targeted relief to assist with income volatility is available to farmers under the income averaging regime. This scheme has been in place since the introduction of farm taxation. It provides a useful mechanism for smoothing out the income volatility associated with the farming sector by allowing farmers to pay tax based on the average of the aggregate profits and losses of the farming trade over a five-year period. In effect, one fifth of the farmer’s profits and losses for the five years is charged for a year.

In acknowledgement of the prevalence of income volatility, my Department sought to introduce further additional flexibility to the income averaging regime in recent budgets to reflect this new reality and to maximise the number of farmers who can level out volatile incomes through the averaging system. In the Finance Act 2014, the availability of income averaging was extended to permit farmers in receipt of income from an on-farm diversification trade or profession to elect into the averaging regime. The period of income averaging was also extended from three to five years, thereby providing a longer timeframe over which income volatility can be smoothed. In the Finance Act 2016, an optional so-called step-out from the regime was introduced for farmers to ease financial pressures and improve cashflow for farmers in a year when they experience lower than expected incomes.

In addition, following discussions with my colleague, the Minister for Agriculture, Food and Marine, Deputy Creed, I have committed to continuing our engagement on exploring further taxation measures for income stabilisation and undertaking a review of agricultural tax incentives more generally in advance of budget 2019. This will include an examination of existing schemes, including income volatility measures, as well as engagement with relevant stakeholders. The aim of the review will be to ensure that these schemes are operating in an efficient and effective manner and meeting their policy objectives in this area.

Therefore, on the basis that there is already a targeted tax measure available to full-time farmers under the income averaging regime and considering that I have already committed to undertake a review of agricultural taxes more broadly prior to budget 2019, I do not propose to accept this amendment.

Yes.

Amendment, by leave, withdrawn.

Chairman

Amendments Nos. 22 to 25, inclusive, are related and may be discussed together.

Deputy Pearse Doherty

I move amendment No. 22:

In page 29, between lines 2 and 3, to insert the following:

“17. The Minister shall within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the ability of certain investors in Irish Real Estate Funds including pension funds and other investment funds to neutralise their tax liability in relation to either income and gains from Irish property held by Irish Real Estate Funds.”.

The Minister of State has dealt with amendment No. 24, although not completely to my satisfaction given the one-year lead-in period. That amendment is no longer being pressed as a result of the five-year dividend withholding tax exemption for non-resident investors in Irish real estate funds, IREFs, now being dealt with in the previous section.

There are a number of amendments in this grouping. To keep the debate focused, we should try to deal with them individually. Amendment No. 22 provides for a report to be laid before the Dáil within six months of the passing of the Act on the ability of certain investors in IREFs, including pension funds and other investment funds, to neutralise their tax liability in respect of either incomes or gains from Irish property held by such funds. This leads on from the conversations we had earlier in public and private sessions of the committee in respect of the make-up of a certain number of IREFs. Some would have a large involvement in pensions, both Irish and European institutional pension schemes and investors. We know that, as a result, pension funds investing in IREFs are able to avail of not paying any tax. We need to deal with that. I am asking that a report be brought forward on the options in dealing with it. Certain investors in IREFs, including pension funds and international investors, can pay no income, corporation or capital gains tax on their income or gains from Irish property. Many feel that this is simply wrong.

For example, the IPUT fund has Irish property assets of €2.2 billion. AIB recently signed a 20-year lease with this fund, which is moving in from Ballsbridge to AIB's corporate headquarters in the centre of Dublin in 2019. The group's contracted annual rental return for 2017 is expected to be €102 million. However, 79% of this fund is owned by pension funds and institutional investors, meaning that the vast majority of its incomes and gains are not subject to taxation. That is a major gap. The fund has €2.2 billion in Irish property assets and a rental book of €102 million, yet 79% of its gains and income is not subject to Irish taxation. This goes back to the point about taxing property and the rights here in terms of such taxation and the benefits that arise from property.

We can look at these funds and examine who really benefits. Certain individuals benefit from them. The lawyers obviously benefit from the structures that are put in place. In terms of the number of staff this fund has, which one would think would be quite large given the turnover in annual rental income and assets of €2.2 billion, it employed 19 people in 2016. If we were to look at its pay bill, we would say it was large at €5.3 million. The average cost per employee is therefore about €279,000 per year. Certainly, it can afford to pay wages of that scale. The vast majority of the income and profits it is recording is not taxable. In respect of institutional investors, Irish institutional pension schemes make up 42% of the fund. European institutional investors make up 37% of it. Then we have Irish investment managers at 17% and Irish charities and universities at 4%.

I do not believe that is a healthy way to go forward. We need to consider issuing a report on how and whether we can bring in measures that would see an appropriate level of taxation of some of these funds, which would have within them investments from pension schemes and other institutional investors that are not subject to tax.

Deputy Michael D'Arcy

Section 23 of the Finance Act 2016 introduced a new tax regime for funds that hold Irish real estate, to be known as Irish real estate funds, IREFs. The section was introduced to address the use of certain fund vehicles to invest in Irish property by non-resident investors. IREFs are investment undertakings, excluding UCITS, where 25% of the value of that undertaking is made up of Irish real estate assets. Where the main purpose of the fund is to invest in Irish property, this will also fall into the regime regardless of the level of property. Where an IREF makes an actual distribution or on the redemption of units in the IREF, non-resident investors will be subject to a withholding tax of 20%. Certain investors such as pension funds, life assurance companies, charities and credit unions are exempt from the withholding tax as this is the norm for such bodies across the tax Acts. The new regime applies to accounting periods beginning on or after 1 January 2017.

To address the Deputy’s point on pension funds and investment undertakings, I note that these entities are investment vehicles. As such, they do not pay tax on the profits generated within the vehicle. Tax is instead operated at the time that the investor, be it the pensioner or the unit holder, draws a benefit down from the pension fund or investment undertaking. Pension funds and investment undertakings are, therefore, among a class of investors that can make a declaration that IREF withholding tax does not arise. This is on the basis that the profits will ultimately be taxed at the investor level. I am advised by Revenue that the first returns from Irish real estate funds will be filed in the middle of next year. At that point, Revenue will examine the IREF taxable events in respect of which IREF withholding tax could have applied and identify reasons why such withholding tax was not operated. If any areas of concern are identified, these will be addressed.

In relation to the IREF withholding tax exemption for gains on assets held in an IREF for more than five years, as we have discussed, I have brought forward an amendment such that it will not apply to disposals on or after 1 January 2019. Real estate investment trusts, REITs, were introduced by the Finance Act 2013. The regime provides for a collective investment vehicle for persons wishing to invest in property. REITs must be widely held, as it is a requirement that the REIT not be a close company, that is, a REIT cannot be under the control of five or fewer participators. A REIT must hold at least three properties and carry on a business of letting property. No one property may account for more than 40% of the total value of the property in the REIT. The REIT must derive at least 75% of its profits from property rental and must distribute at least 85% of its property income to shareholders.

I understand from the Revenue Commissioners that, as there are only three REITs in Ireland at present, for reasons of taxpayer confidentiality it will not be possible to share the information sought by the Deputy with the committee, or indeed with myself. However, I understand that Revenue’s large cases division has a dedicated team which looks after REITs. As the REIT regime was introduced in Finance Act 2013 that team is, as part of Revenue’s normal compliance review process, reviewing the structures of those REITs and the tax payable by those companies. Should any issues arise from that review, Revenue will bring those matters to the attention of my officials.

Deputy Pearse Doherty

I move amendment No. 23:

In page 29, between lines 2 and 3, to insert the following:

“17. The Minister shall within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the impact that Irish Real Estate Funds and Real Estate Investment Trusts are having on residential property prices in the State.”.

This also asks for a report on the effect IREFs and REITs are having on residential property prices in the State. I briefly discussed the effect of the help-to-buy scheme on property prices with the Minister for Finance. It is clear from CSO figures that REITs and IREFs are hoovering up a huge amount of property across the State, particularly in Dublin. The latest figures I have show that €13 billion of property is in funds, though the Minister suggests it may be €16 billion.

Deputy Michael D'Arcy

There is between €15 billion and €16 billion in IREFs and some €2.5 billion in REITs.

Deputy Pearse Doherty

I think it is close to €3 billion in REITs according to the latest valuations. The total value of Irish property within these funds is between €18 billion and €19 billion. The CSO has revealed that non-household buyers, a large proportion of which comprise REITs and IREFs, had purchased 42% of new homes in Dublin by the end of July 2017. In the middle of this housing crisis, with people queuing up for houses and being outbid for them, non-household buyers are buying 42% of available properties in Dublin. First-time buyers only make up 25% of the market and are competing with these multibillion euro funds.

It should be remembered that there are only 100 IREFs and three REITs. As such, 103 companies have €18 billion to €19 billion worth of fire-power. That is the level of assets they have in their structures and they are out there competing with Mary and John who are trying to get onto the property ladder but who are being outbid all the time. There is a reason for that. The tax code provides a very lucrative arrangement for these funds, which allows them to outbid others.

While most of the focus of these funds is in Dublin, we see nationally that non-household buyers purchased 13% of all homes in the State in 2016. When one isolates local authorities and approved housing bodies from the figures, one finds that, within this category, 10% can be attributed predominantly to REITs and IREFs. As such, 10% of all homes across the State were purchased by REITs or IREFs. The 2017 figure nationally will be ahead of that. It is a disgrace that these tax avoidance structures are pushing up prices through the demand of the funds for property. They have the firepower to buy up huge tranches of housing, which results in many ordinary people being unable to even dream of owning their own homes. We have to change the tax structures within these funds. Whatever the argument was about the need for vultures in 2013, it is no longer that point in time.

We have a huge problem with regard to housing supply and the last thing we should do as a Parliament is unleash these tax effective or avoiding structures onto first-time buyers in the market. They do not have a clue what is happening. Many of them are oblivious to what we are doing in this committee but we have passed the legislation to set up the tax structures which are now competing with ordinary Dubliners and people in Donegal for first-time houses. That is why property prices are increasing by 12.8% nationally and by higher rates in certain categories in Dublin city in particular. It is not all attributable to that but going back to the statistics, 42% of houses bought in Dublin to the end of July 2017 were bought by non-household buyers. Non-household buyers include a number of cohorts, namely, REITs, IREFs, local authorities and approved housing bodies. When we isolate the national figure of 13% and take away local authorities and approved housing bodies, 10% involves REITs and IREFs.

This proposal is looking for a report on the impact IREFs and REITs are having on residential property prices in the State. This is required urgently. I have suggested six months to be consistent with the timeframe in terms of the reports, but it needs to be done as a matter of urgency. What is going on in the Dublin market is crazy. This is not just coming from the left. Economists and big firms are calling for penalties on cash buyers and non-household buyers. There is a time for intervention. When these non-household buyers are buying up nearly twice as much of the Dublin property market in domestic homes as first-time buyers, the time for action is long past.

Deputy Michael D'Arcy

On the point that the number of non-household buyers has increased significantly, the CSO has clarified that this classification is made up of three broad categories, namely, State and semi-State bodies, charitable, religious and approved housing bodies and private companies, which are the REITs and investment funds. It is the CSO's intention to publish a breakdown of these figures into the three categories shortly. However, it is likely to be March 2018 at the earliest before it has any actual figures. At that stage, we will have the information to do the analysis. There are three REITs operating in the Irish market, of which two are active in the residential market. IRES has approximately 2,400 apartments, while Hibernia has just over 300 apartments. The rationale behind the introduction of the REITs was their design specifically for long-term holding of income-producing property. They are not designed to be a vehicle for short-term speculative gains. The REIT regime brought a new source of capital into the market, reducing dependence on banking finance and freeing up available banking finance for other uses. By facilitating collective investment, REITs also provide risk diversification for investors of all sizes to promote the professionalisation of the Irish property market. They are also key to the development of a build-to-rent market in Ireland.

I hear what Deputy Pearse Doherty is saying. We can all have our ideological debates but all parties across both Houses want to try to improve the housing situation for everyone. We will not have the information back from Revenue until next July or thereabouts. As such, we have an information vacuum at this moment in time. To put this in context, there are 2 million homes in the country. It is difficult to pluck a figure from the sky, but if we suggest an average price of €250,000 per home, that is a residential value of €500 billion, excluding commercial property. If one adds commercial property, it is impossible for me to put a figure on it. REITs and IREFs have assets of €18 billion to €19 billion. They have given investors, including pension funds, the opportunity to make a tax-efficient investment. There is a serious problem, as the Deputy well knows, for Irish pension funds into the future. He mentioned one in particular. For each one, there are many thousands of small investors who are trying hard to have a pot for when they retire. It has not been easy. Again, we can have an ideological debate about whether it should be allowed at the higher rate, but for the vast majority of people, these are tax-efficient methods for investing. At €18 billion or €19 billion, it gives smaller investors the opportunity to be tax efficient. They do not have to be at a scale which puts them into a very wealthy person's space. In the scheme of a property sector worth perhaps €500 billion for residential and whatever the value of commercial property is, €18 billion or €19 billion is not a huge amount.

Deputy Michael McGrath

I want to focus for a moment on REITs, which file an annual return by the end of February. What information is provided in the annual return? On the policy rationale, Ireland was a very different place in 2013. There were apartments available in Grand Canal Dock for what now appear to be very low prices. I can understand the logic of seeking to professionalise and institutionalise the rental market or, at least, a certain part of it. There is such a shortage of supply of stock now, however, that I ask the Minister of State to elaborate on the Government's policy on this issue currently and the logic of it. One must compare the tax treatment here with the taxation treatment of ordinary landlords, who pay at up to the 55% marginal rate, and of Irish companies which hold property but do not meet the test to form an IREF or a REIT.

Deputy Richard Boyd Barrett

When we are trying to get to the truth of these tax breaks which are given to corporations or property interests, it is always revealing to look at how they are touted by the consultancy and accountancy firms which do the work of getting these people in.

The Minister of State will report back to us.

Deputy Joan Burton

Second, I understood the Minister of State to say that, presumably following more work by the CSO or further publication of census data, he will have information.

Deputy Michael D'Arcy

Next March. It will be CSO data, not census data.

Deputy Joan Burton

The granular detail we have in terms of non-household buyers will be able to identify the purchasers of new homes and all homes in the different sub-categories of IREFs and REITs.

Deputy Michael D'Arcy

They have said they will do the best they can to make sure that the information that is made available to them will be presented to the committee.

Amendment, by leave, withdrawn.

Chairman

We had agreed to break at 5 p.m., so I suggest we break at 5.30 p.m. instead. We have a few minutes to go. Is amendment No. 24 being moved?

Amendment No. 24 not moved.

Chairman

Amendment No. 25 has already been discussed with amendment No. 22 but the Deputy wanted to discuss it separately.

Deputy Pearse Doherty

I move amendment No. 25:

I do not have that figure but I will accept it from the Deputy.

Deputy Pearse Doherty

On book value, the profits recorded by these three REITs came to €329 million in 2016. Of this, they paid €8 million in dividend withholding tax. That is wrong. It is not that they have done anything wrong. The Oireachtas has done something wrong by creating this structure.

Recalling the earlier conversation, these are the guys who are outbidding first-time buyers. They are able to do that because, out of a profit on rental income of €117 million, they only paid €8 million in dividend withholding tax. That gives them the firepower to outbid individuals and buy up whole blocks of accommodation.

Deputy Michael D'Arcy

Taxpayer confidentiality cannot be ignored and no individual’s information will be made available. The aggregate data can be applied to REITs and IREFs, however.

I am happy with amendments Nos. 22 and 25. Amendment No. 23, requiring a report on the influence of REITs and IREFs on property prices, is somewhat broad, however. I do not want to commit to a report we might not be able to do.

Chairman

Will the Minister of State clarify this with Deputy Doherty in order that he can resubmit his amendments on Report Stage?

Deputy Michael D'Arcy

Yes.

Amendment, by leave, withdrawn.

Sitting suspended at 5.40 p.m. and resumed at 6.50 p.m.

Chairman: We now turn to amendment No. 26 under the name of Deputy Joan Burton. She is not present, so the amendment cannot be moved.

Amendment No. 26 not moved.

Chairman

Amendment No. 27 is out of order

Amendment No. 27 not moved.

SECTION 17

Question proposed: "That section 17 stand part of the Bill."

Deputy Paschal Donohoe: I wish to flag a potential amendment on Report Stage in respect of section 17.

Deputy Pearse Doherty

Will the Minister elaborate on what that will that relate to?

Deputy Paschal Donohoe

It is a technical amendment that I am bringing forward on the advice of the Revenue Commissioners to ensure that the section works as intended. I will circulate a draft of the amendment to the Members when I have it.

Deputy Pearse Doherty

That is fine.

Question put and agreed to.

SECTION 18

I propose to take amendments Nos. 28 to 37, inclusive, together.

I move amendment No. 28:

In page 30, to delete lines 36 to 39 and substitute the following:

“(ii) ‘relevant period’ means the accounting period beginning on the first day of the period of account in which the change in accounting policy, referred to in paragraph (b), is adopted for the first time.

(b) This subsection shall apply to a change in accounting policy other than on the adoption of—

(i) an accounting standard for the first time, or

(ii) an amendment of an accounting standard for the first time.”.

Most of these amendments are technical in nature with the purpose of correcting minor drafting errors and ensuring that the legislation operates as intended. There are however two more substantive amendments.

The first substantive amendment relates to the taxation of transitional adjustments arising upon a change of accounting framework or the adoption of a new or amended accounting standard. To ensure that the "relevant amount" is taxable or deductible, as the case may be, over a five year period following the transition, it is necessary to delete “for the relevant period” from paragraph (4)(c) and to substitute “an accounting period” for “the relevant period” in paragraphs (4)(d) and (4)(e).

The main substantive amendment is number 36, which concerns the tax treatment of accounting errors. The legislation as currently drafted is inconsistent in that non-material or non-fundamental errors are subject to statutory interest and penalties whilst material or fundamental errors are not. This amendment ensures that all accounting errors should be corrected by means of amended tax returns, subject to normal time limits. Where this results in increased tax liabilities, statutory interest and penalties will apply.

In order to give effect to this amendment, the original subsections (5) and (6) have been deleted and replaced with a new subsection (5), which is based on an amalgamation of the original subsections (5) and (6).

Deputy Joan Burton

I would like to ask the Minister about the standards adopted regarding accounting for pensions in the accounts of businesses.

The Minister will be aware that the accounting standard dealing with pensions is extremely controversial in requiring a full liability provision. It has meant that many private sector pension funds have gone out of existence. I want to know if in the context of this change over the Minister or his Department has given any consideration to changing any of the accounting treatments in order to make provision for greater protection of defined benefit schemes in particular. The system of accounting has inevitably led to the demise of a vast number of pension funds in private firms and in fact there have been many different treatments. In the case of Clerys, one thing that happened was the owners tried to rid themselves of pension liabilities. In this context, does the Minister or anyone in his Department have any proposals to address this? For people in the public sector or who are funded by the public sector, there is a system where people who are currently working are paying for the pensions of those who will retire in subsequent generations, which means that the pensions are much more secure. The same applies to the social insurance system where current contributors pay towards the State retirement pensions of people who have retired.

Will any examination be carried out by the State of the implications particularly for pension funds, which have caused enormous disruption in the way that they have been dealt with in the past? Will there be a review from a public interest point of view of how pensions are accounted for?

Deputy Paschal Donohoe

Chairman

Will the Minister come back to the committee on that?

Deputy Paschal Donohoe

I will.

Amendment agreed to.

Deputy Paschal Donohoe

I move amendment No. 29:

I move amendment No. 36:

In page 32, to delete lines 37 to 42, to delete page 33, and in page 34, to delete lines 1 to 31 and

substitute the following:

“(5) (a) In this subsection—

(i) ‘material error’, ‘fundamental error’, ‘retrospective’ and ‘opening reserves’ shall be construed in accordance with generally accepted accounting practice;

(ii) ‘relevant amount’ means the amount representing the correction of an error which is taxable or deductible, as the case may be, by virtue of paragraphs (c) or (d) as adjusted to satisfy the

requirements of paragraphs (e) and (f);

(iii) ‘relevant period’ means the accounting period beginning on the first day of the period of account in which the error, referred to in paragraph (b), is corrected for the first time.

(b) This subsection shall apply where a company’s accounts include the correction of an error.

(c) Subject to the Tax Acts, an amount representing the retrospective effect of correcting either a material error or a fundamental error which is recognised in opening reserves (howsoever designated) for a period of account in accordance with generally accepted accounting practice shall be taxable or deductible, as the case may be, in computing the profits or gains of a company for the purposes of Case I or II of Schedule D.

(d) Subject to the Tax Acts, an amount representing the effect of correcting an error which is neither a material error nor a fundamental error and which is included in the profits of a company for a period of account as computed in accordance with generally accepted accounting practice shall be taxable or deductible, as the case may be, in computing the profits or gains of that company for the purposes of Case I or II of Schedule D.

(e) An amount shall not be regarded by virtue of paragraphs (c) and (d) as deductible in computing the profits or gains of a company for an accounting period for the purposes of Case I or II of Schedule D to the extent that—

(i) a deduction has been made in respect of that amount in computing such profits or gains for a previous accounting period, or

(ii) the company has benefited from a tax relief under any provision in respect of that amount for a previous accounting period.

(f) An amount shall not be regarded by virtue of paragraphs (c) and (d) as taxable in computing the profits or gains of a company for an accounting period for the purposes of Case I or II of Schedule D to the extent that the amount was treated as taxable in computing such profits or gains for a previous accounting period.

(g) References to profits or gains in paragraphs (c), (d), (e) and (f) include references to losses.

(h) Subject to the Tax Acts, the relevant amount shall neither be taxable nor deductible, as the case may be, for the relevant period but instead—

(i) where any part of the relevant amount relates to the relevant period, then that part of the relevant amount shall be taxable or deductible, as the case may be, for the relevant period,

(ii) where any part of the relevant amount relates to an accounting period which commenced on or after 1 January 2013, then the return and self assessment for that accounting period shall be amended in accordance with section 959V to correct that part of the relevant amount, and

(iii) where any part of the relevant amount relates to an accounting period which commenced before 1 January 2013, then the return for that accounting period shall be amended to correct that part of the relevant amount and for this purpose section 959V shall apply to such an amendment as if—

(I) subsections (2) and (4) of that section shall not apply,

(II) references in that section to ‘return and self assessment’, ‘return and a self assessment’, ‘return and the self assessment’ and ‘return or self assessment’ were references to ‘return’, and

(III) the reference in that section to section 959Z was a reference to section 956.”.”.

Deputy Joan Burton

May I ask a question on amendment No. 36, which deals with a really important point that has large taxation implications? It is a question of fundamental errors, changes and retrospection in accounting. This is one of the major areas in which treasuries lose taxes. Will the Minister outline the policy the Department has taken?

Deputy Paschal Donohoe

Where the financial statements include the correction of an error such as a change from an invalid basis to a valid basis, existing practice based on case law principles provides that the accounting profits must be computed on a new valid basis. Any adjustments which need to be made in order to compute taxable profits on a valid basis must be done by changing the tax computations for those periods. However, the tax computations may only be amended subject to the normal statutory time limit for the correction of errors.

The Finance Bill 2017, as initiated, distinguishes between material or fundamental errors and non-material and non-fundamental errors which are recognised in the current year profit and loss accounts. However, the Finance Bill 2017 as initiated incorrectly treats material or fundamental errors in the same way and this is the subject of this amendment No. 36.

Deputy Joan Burton

Amendment agreed to.

Deputy Paschal Donohoe

I move amendment No. 37:

In page 34, lines 36 and 37, to delete "as respects accounting periods ending on or after the date of the passing of this Act".

Amendment agreed to.

Section 19, as amended, agreed to.

Chairman

Amendments Nos. 38 and 49 are related and may be discussed together. I remind members that when amendments are grouped, as in this case, they should raise all issues relevant to those amendments in the discussion on the moved amendment.

NEW SECTION

Deputy Paschal Donohoe

I move amendment No. 38:

In page 34, between lines 37 and 38, to insert the following:

“Amendment of section 135 of Principal Act (distributions: supplemental)

20. (1) Section 135 of the Principal Act is amended—

(a) by inserting the following subsection after subsection (2)—

“(2A) No consideration derived from any share capital or security of a company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘first-mentioned company’) issued to another company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘second-mentioned company’) in exchange for the issue of shares or securities by the second-mentioned company shall be regarded for the purposes of this Chapter as new consideration received by the second-mentioned company in so far as it exceeds any new consideration received by the first-mentioned company for the issue of the said share capital or security.”,

and

(b) by inserting the following subsection after subsection (3)—

“(3A) Where a member of a company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘first-mentioned company’), or a person connected with that member, enters into arrangements directly or indirectly with another company (being a close company within the meaning of section 430 and in this subsection referred to as the ‘second-mentioned company’), whereby a member (in this subsection referred to as the ‘disposing member’), of the first-mentioned company disposes of an interest in shares or securities of the first-mentioned company and the consideration for the acquisition of those shares or securities is paid or to be paid directly or indirectly out of the assets of the first-mentioned company, any amount received directly or indirectly by the disposing member from the second-mentioned company in respect of the disposal shall be treated for the purposes of this Chapter as a distribution made by the first-mentioned company to that member at the time of the payment by the second-mentioned company, and this subsection shall apply however many companies participate in the arrangements.”.

(2) This section shall come into operation on 2 November 2017.”.

These amendments form a package of anti-avoidance measures being introduced to deal with a number of specific tax avoidance schemes which have been uncovered by the Revenue Commissioners. Essentially, these schemes involve converting what should be taxable income payments into capital payments to avail of the lower capital gains tax rates. The potential charge to capital gains tax is then often avoided by the use of CGT reliefs such as retirement relief and entrepreneurial relief, resulting in funds being extracted by shareholders entirely tax free or at a significantly reduced tax liability. It is unfair that some individuals are engaging in these tax avoidance structures solely to take advantage of lower tax rates. This leads to unfair outcomes and puts other taxpayers who do not engage in such avoidance arrangements at a competitive disadvantage. I am, therefore, taking steps to counter these avoidance schemes.

I am amending the distribution rules in section 135 of the Taxes Consolidation Act 1997 for determining whether an amount is to be treated as a distribution of income for tax purposes. The first amendment deals with a scheme which has been exploited by taxpayers in order to generate new capital in a company, without investing any fresh capital, so as to enable income to be turned into capital on a subsequent repayment of the share capital. The distribution rules are being amended to ensure that any artificially generated capital will be properly subject to income tax when it is subsequently distributed to shareholders.

The second amendment to section 135 deals with another scheme identified by Revenue, which seeks to avoid a liability to income tax where a company indirectly buys back shares from a shareholder. The provisions are being amended to ensure that distribution treatment correctly applies.

I am also bringing forward proposals to amend the capital gains tax provisions in order to restrict the availability of CGT relief in respect of certain connected party transactions by individuals. This follows the identification by Revenue of three specific avoidance schemes in operation involving the disposal of assets to connected parties by individuals, without any change in the underlying beneficial ownership of the asset, in order to extract cash from a business in a tax free manner.

I am therefore restricting the availability of retirement relief and the revised entrepreneur relief in respect of such connected party transactions. In addition, an amendment is being introduced in relation to inter-family disposals of shares and securities to ensure that the maximum tax-free threshold, which is laid down in the legislation, cannot be circumvented.

Deputy Michael McGrath

I have a question on the new section.

In respect of anti-avoidance, in the context of the Paradise Papers that are being revealed every day, although it is early days yet has the Minister any indication from Revenue that it needs to strengthen its anti-avoidance powers to deal with transactions or tax structures which, in its view, are designed to reduce or eliminate a tax liability in the State in the context of offshore activity? The Minister introduced an initiative in budget 2017, which ended up bringing in €79 million when the estimate was €30 million, but has he had or will he have discussions with Revenue prior to the completion of the passage of this legislation on the question of extra powers, particularly around anti-avoidance, in order that the Revenue can intervene and strike down transactions or structures that are clearly designed to deprive the Exchequer of revenue?

Deputy Paschal Donohoe

I had a detailed discussion with the Revenue Commissioners about this matter on Monday morning when the papers began to be released because of my concerns regarding the allegations that were contained in the newspapers. In that discussion, the Revenue Commissioners did not indicate that they require further power. Were they to come back and give such an indication, I would, of course, do everything possible to ensure those powers were given to them.

Amendment agreed to.

SECTION 20

Deputy Paschal Donohoe

I move amendment No. 39:

In page 38, line 2, to delete "section 247(2)(b)(iv)" and substitute "section 247(2)(a)(iv)".

Amendment agreed to.

Section 20, as amended, agreed to.

SECTION 21

Chairman

Amendment No. 40 in the name of Pearse Deputy Doherty is out of order, as it involves a potential charge on the people.

Amendment No. 40 not moved.

Question proposed: "That section 21 stand part of the Bill."

Deputy Pearse Doherty

I tabled an amendment to section 21 that would have followed through on issues I raised during the earlier budgetary process to the effect that this measure, which allows for a capital allowance to be set off 100% of the profit recorded by a trading company, would revert to the pre-2014 position where only 80% would apply. I welcomed the pre-2014 position. I will go into details in terms of the motivation for the changes at that time. It is my view that this should apply from now, and to capital allowances that have been onshored in the past number of years. The Minister is of the view that the cap applies to capital expenditure incurred by a company on or after 11 October 2017. I understand it is a policy choice, that the Minister has no legal reason to do this.

It is only fair to acknowledge the sterling work Mr. Seamus Coffey has done on this in his report on corporation tax that was commissioned by the Minister following last year's budget. I am sure the Minister has read the report. Mr. Coffey wrote a blog which detailed the amount of revenue that has been lost and that will be lost in this tax year as a result of the measure the Minister is introducing only applying from 11 October this year. Mr. Coffey argues strongly that there is no reason for that to be the case. He makes the point that if the Minister did not apply this grandfathering effect, the amount of revenue that could be collected in 2018 would be €1 billion as opposed to the €150 million the Government is expecting. Mr. Coffey also draws attention to the fact that the onshoring of these assets, mostly intellectual property, has resulted in increasing our GNI, which, as a result, has increased our contribution to the European Union, and the portion of the increase resulting from the onshoring of these assets equates to €200 million. He makes the easy calculation that in ten years we will pay approximately €2 billion more to the European Union as a result of the onshoring of these assets and the conclusion being drawn is that we will not be taxing these during this period. I am sure the Minister will say that this is deferred tax etc., but that is not necessarily the case. That is only the case if the companies still exist in their current tax structure form at the point when all of these capital allowances are used up. There is no certainty whatsoever that many of these highly mobile companies will have the same structure at that point in time and, therefore, will pay an increased level of taxes. There are a number of companies that we could look at which have left these shores in the past, and that is where the Minister could get seriously caught out. I cannot understand why when the author of the report, although he has not called for that, has made it clear that he sees no reason for it. He makes it clear that if there are other companies willing to come here and if the Department expects €150 million to be recouped from this then obviously people are still willing to come and invest in us.

Second, I have deep suspicions, as I said on budget night, about how this happened. Before the Paradise Papers were released, I had serious concerns about how this happened. The Paradise Papers only strengthen my suspicions. The history of it is that in 2013, in the Finance Bill, the Government decided to end the stateless status following huge international pressure. I was pursuing the Minister's predecessor with regard to this issue about stateless companies. He kept on denying that we had the ability to end it. I wrote legislation and pointed out the provision in the Act that needed to be changed. That is exactly what happened in the Finance Bill in 2013 but, crucially, the effect of this only came into effect over a year later, on 1 January 2015. Then we had the double Irish, which was closed down in the Finance Bill of 2014. The former Minister, Deputy Noonan, told us that this was a mismatch between two tax codes, which is technically true, that we did not have the ability to close it down unilaterally, and that the only problem with the double Irish was that it had "Irish" in its name - that was the phrase the former Minister used on the floor of the Dáil. Lo and behold, as a result of pressure, international and domestic, we had the double Irish closed down. As the Government closed down that loophole, however, it made a conscious decision to change how capital allowances could be written off against profits. Up until then, a level of profits could not be written off as capital allowances - it was 20% and 80% was the threshold - but the Government decided to increase it to 100%. The Government knew that as a result of changing the residency status within our tax codes there would be onshoring of intellectual property, IP. We now know what happened. We see, from the 26% growth rate and so-called leprechaun economics, that hundreds of billions of euro worth of intellectual property was onshored in the State.

We now know from the Paradise Papers that during that period when the Government was ending the stateless rule - when we questioned the Minister on this we were told that to his knowledge only three companies were stateless - that of the three Apple subsidiaries based in Cork that has no tax residency here or anywhere in the world, two ended up in Jersey and one became an Irish resident company. One of the Jersey companies, Apple Sales International, ASI, which had the rights to the intellectual property of Apple which was worth about €170 billion sold those rights to Apple Operations Europe, AOE, which is the Irish resident company, and as a result of that it is able to use its capital allowances to write off against any profits in this State for a long period.

How does this affect us? Apple confirmed yesterday that all sales outside of the Americas are being registered through an Irish company in Cork. The value of those sales is €119 billion. Apple confirmed that. That was the same position prior to 2015 when we ended the stateless designation of those companies. In 2014 they were stateless and had no tax residency so even though all this money went through a company which recorded a turnover or sales of €119 billion it did not have to pay tax because it was not tax resident here or anywhere else and that is subject to the European Commission's infringement proceedings. When we made them stateless, and now Apple have confirmed that all those sales are still being recorded in this State, one would imagine that we would be in receipt of a massive windfall of corporation tax from Apple. That has not happened. Apple paid €1.5 billion, it tells us, over the last three years in taxation. Some of this is on the public record and we know that a certain part of the company paid €430 million, but where is the tax from the new company that is no longer stateless that now has sales recorded of €119 billion? It does not exist because even though the company is no longer stateless, the loophole, a measure the Minister's predecessor introduced, allows it to write off all these capital allowances, the intellectual property that was taken onshore, against all its profits. Things had come to a point where no one could accept that any company could have no tax residency anywhere in the world so the Government closed that door on Apple but it gave it 13 or 14 months to get its act in order, which it did. It went to Appleby, got its structure in place, sent the two companies to Jersey, registered one in Ireland, took the intellectual property over and then it used the capital allowances to pay no taxes.

That the Government did that at that particular time is deeply suspicious. I want the Minister to put on the record all the engagements which he, his predecessor and their officials had with Apple during that period. I want him to tell us the lobbying by any individuals regarding the onshoring of intellectual property. For instance, the head of tax in Allergan, a company based in County Mayo - an individual who has been reported in the context of the Paradise Papers but is not himself involved in the Paradise Papers, he is mentioned in the side reporting of the papers - lobbied the Government and talked about how, with the changes to tax residency, there needed to be certainty as a result of onshoring of intellectual property. That is the point that I made at the beginning. There is no way that the Minister or the Department did not know that a change of tax residency rules would result in an onshoring of intellectual property and, as such, I seriously question the Government's motivations, or the motivations of its predecessor, for closing what was a stateless company which was frowned upon internationally and then opening a loophole to effectively give the same company an ability to continue not paying tax on sales in excess of €100 billion.

Chairman

We must break for a vote in the Dáil. We will return to this question after the vote.

Sitting suspended at 7.35 p.m. and resumed at 7.55 p.m.

Deputy Paschal Donohoe

I wish to be clear on one point from the start. Because this measure was passed via a financial resolution on the night of the budget it is in effect from now. The measure became available and applicable from 11 October 2017. In relation to the various points Deputy Doherty has put to me, before I refer to them I will make the point that the opportunity that is ahead of this country at the moment is one that other countries are pursuing and are aware of, namely, to be in a position where we have a combination of commercial activity, manufacturing activity, research and development activity and the registration of IP assets, all from the same company located within Ireland. We have the potential to realise that because of the number of employers we already have located in this country whose companies tend to be associated with, and tend to have, intellectual property assets that have a high value. As I look out, with many of the different issues that we have to manage, I see the prospect of us being able to achieve that form of co-location, as something that would be very valuable for Ireland. In terms of the decisions that I have made in relation to the Finance Bill and this particular amendment, I will outline the reason I have decided to make it applicable from 11 October - it is applicable on a forward-looking basis. The Deputy is correct that it was a policy choice. The legal framework was there to do it. My judgment is that at the core of our corporate tax framework is the concept and value of predictability, of being able to explain to people that if they locate jobs and investment in our country that we will tax them in a certain way going forward and that people are clear on that.

My view was that if I introduced a measure like this that was retrospective in the context of assets that had already been moved here, it would deal a massive blow to my ability to be able to argue that our corporate tax code and the policy relating thereto are predictable, clear and certain. In essence, I would have been claiming that we would now change how we would tax the assets a company had moved in here in the past as well.

Deputy Pearse Doherty touched upon this point. We are talking about the timing of payment of tax; it is deferred tax. The Deputy stated that this might not apply because we might get an income stream from a company now because of how we tax the intellectual property asset. The company might not be around in a number of years, however, at which point the reliefs relating to the depreciation of the asset would be gone and we might not be able to claim revenue from that company. That is not a way in which I can structure tax policy. I cannot structure tax policy on the basis of my personal view or that of the Government as to whether a company will be around in the future. If companies are located here, are employing here and have investments located here, we must assume they will be here for a period. Many of the companies that have been at the heart of the recent debate have had operations located in Ireland for many years. I will not get into the debate over the tax affairs of a particular company tonight because I must respect its confidentiality as I would for any other taxpayer.

On the timing of this decision and the previous one, I have not had contact with any individual on the matter. Mr. Seamus Coffey gave me a report. On the basis of that report, I made a decision, in consultation with my Department and other Departments, on what I believed was the right choice. I no more went out and sought the opinion of individual companies on this matter than I did with any other measure in this Finance Bill. I made what I felt was the overall right decision for the country.

Before the change was made, the threshold stood at 80% and then it went to 100%. At the time it went to 100%, many of the peer countries to which we would have compared ourselves would have treated intellectual property assets in the same way. It is the right decision to introduce a cap in respect of the depreciation of intellectual property assets and how this is dealt with because of the scale of assets on which we are focusing. When the decision was made to move it back to 100%, that was the case in other countries to which we would have compared ourselves and countries against which it was important for us to be competitive.

Having said that, I believe this is the right stance for us to take. It is also apparent to me and to all who debate and discuss these matters that the scale of the assets being moved around is bigger than in the past. What has had a decisive effect on the attractiveness of Ireland as a place in which such assets could be located is the effect of the OECD work that has happened throughout the world, particularly in the past 12 to 18 months, and that means it is no longer possible to locate these assets in other locations in which they would have been located in the past. As a result, companies want to find locations for the assets. It will be of long-term value to Ireland to have the assets located here, taxed in the way I propose and co-located with commercial, manufacturing, and research and development activity. I am making this decision in the Finance Bill in the context of that view.

Deputy Pearse Doherty

The Minister has said the companies at the centre of this have a long-standing relationship with the State. I accept that the Apple company in Cork that employs more than 4,000 people has been here for a long time. Hopefully, it will stay for an equally long time. We are not talking about the company for which the employees work; we are talking about the other companies. Two of them skedaddled to Jersey. Apple Sales International is no longer based in Ireland. Apple Operations International is no longer based in Ireland; it is now based in Jersey. They left because Ireland decided to end the stateless company status they enjoyed.

The other company Apple Operations Europe, AOE, decided to register here for one reason only. It was because there is no tax implication on the profits attributed to all the sales of products recorded by that company outside America, worth €119 billion, because it is allowed to use its capital allowance against its taxes. It is able to do that because the Government and the Minister's predecessor allowed that change to happen.

Was the Minister, his predecessor or the Department aware that as a result of the change to the residency rules there would be an increase in the onshoring of IP? Was the Minister lobbied on giving certainty to these companies onshoring IP? Was that factored into the judgment to change the threshold from 80% to 100%? The consequence of that was that in the period from 2014 to 2015, the claims for capital allowances went up from €2.8 billion to €28 billion, a massive increase. However, it does not end there because hundreds of billions worth of IP was taken onshore during that period. I ask the Minister to answer first those questions on the lobbying of the Department of Finance and the Minister over certainty of IP onshoring as a direct result of the changes in residency the Government introduced in 2013 and 2014. I know it happened. Companies lobbied to have IP onshored. The Paradise Papers inform us what Apple is doing. Once all Apple's capital allowances are used up, AOE could move to Jersey or anywhere and then we will never see the taxation on the profits.

We need to remember what we are talking about here. We have discussed a lot of stuff in respect of this Bill over the past two days. The Minister is deciding to forgo €850 million of tax. To change that all we have to do is change four numbers in the Finance Bill - just the date of application. The Minister wants it only to apply going forward because he wants certainty for Apple that it will not have to pay a penny in tax for the next decade on the €190 billion in transactions it is recording in an Irish company. That is what the Minister is doing.

There are serious questions. I have serious suspicions that a deal was done. It may not have been done directly sitting across the table with Apple because people are smarter than this. However, the Minister knew when the Government closed down the stateless companies that those stateless companies had to do something - either leave here for another jurisdiction, which two of them did, or register here. Allowing them to take their IP onshore and increasing that to 100% gave them a massive windfall. It is not just Apple, but Apple is the major beneficiary of it.

The Commission is now looking into its post-2015 structure. This stinks to high heaven. As the Minister has said, this is a policy choice. It has been made by the Minister and not by his officials or legal advisers. He has decided to let an annual sum of €850 million go amiss. He has decided to let Apple be able to write off its taxes and to settle for the €150 million that will come in the future. That is not sensible. Is the Minister aware of the lobbying that went on regarding the proposal to move intellectual property onshore as a result of the changes in tax residency rules? Did that factor into the decision made by the Minister at that time? Will the Minister release all of the documents relating to lobbying directly to the Minister, the Minister of State or any officials within the Department over the period from 2013 to 2015, including any direct or indirect contact with Apple or any of its subsidiaries?

Deputy Richard Boyd Barrett

Everything about the Apple situation, including the changes made in the budget by the former Minister for Finance, Deputy Michael Noonan, in 2014, stinks to high heaven. Frankly, it stretches credibility that this happened at a time when new political forces had come into this Dáil. In 2012 and 2013, Deputy Pearse Doherty and I raised at the then Joint Committee on Finance, Public Expenditure and Reform the massive loopholes we could see in the corporate tax regime. We suggested that the effective rate being paid by big corporations like Apple was a tiny fraction of 12.5%. The double Irish arrangement was at the centre of that. There are plenty of other examples of loopholes. We will talk about some of them in a moment. When the spotlight began to come on, the reaction of the Fine Gael-Labour Party Government and Fianna Fáil was to close ranks immediately in order to protect Apple. In July 2013, when this stuff was starting to be debated, Deputy Pearse Doherty and I proposed that representatives of Apple, Google and Facebook should be brought before the finance committee to face questions about the tax affairs of those companies. The cameras were literally shut off as a result of a manoeuvre from the Chairman of the committee. Fine Gael and Fianna Fáil, along with Deputy Donnelly and a couple of others, voted to switch off the cameras while we debated whether Apple and the other companies might be brought in. Not only did they not want those companies to come in, they did not even want anyone to know we were discussing whether they should come in.

In 2013, the Government closed ranks to protect Apple and ensure it was not questioned about what it was up to. At this time, international and domestic pressure was building with regard to the double Irish arrangement. Right up to the last moment, the Government denied that this country was playing any role in that arrangement. It was finally forced to announce that it would be closed, although it is worth noting that it is still not closed. It is still operable up to 2020 for companies that have benefited from it. Apple, and probably others, had to try to find a new way of evading tax. In January 2014, the then Taoiseach, Deputy Enda Kenny, met the CEO of Apple. I would love to know what happened at that meeting. I do not know what happened. The closeness of this Government's relationship with Apple is remarkable. We know from the Paradise Papers, or, as I like to call them, the parasite papers, that in March 2014, lawyers acting on behalf of Apple began to search for new ways to avoid paying tax. According to one of the leaks, Baker McKenzie, which was acting on behalf of Apple, contacted Appleby about its various tax haven locations and asked it to "confirm that an Irish company can conduct management activities... without being subject to taxation in your jurisdiction". That is what Apple wanted to do. It wanted to avoid paying any tax at all and, as we have now discovered, that is what it did.

Shortly afterwards, the then Minister, Deputy Noonan, decided to change the allowances regime for intangible assets, such as Apple's intellectual property assets from which it derives its profits and around which much of its tax evasion activity centres. I refer to the manner in which it sells ideas or intellectual property assets from one arm of the company to another, thereby turning profits into costs and consequently writing down its tax liabilities. Oddly and strangely, we made this change at this time. It is quite extraordinary. Frankly, I do not even understand why it should get an 80% allowance, never mind a 100% allowance. Why should it get an 80% allowance on these intangible assets? I would like somebody to explain that to me. When one arm of a company supposedly sells something to another arm of the company, which is a joke in and of itself, the company in question is allowed to claim massive allowances and gain enormous tax benefits that are worth hundreds of millions of euro to the company. We used to give this company an 80% tax break, but in the year in question, that was increased to 100%. Why did that happen? Is it a coincidence that it happened in the same year that Apple had to start thinking about restructuring its tax avoidance strategies? It moved one of its subsidiaries, which was previously based here, to the Channel Islands. I presume that company now sells the asset to the Irish-registered company without having to pay any tax on the profit it gets. It has discovered via Appleby that it pays no tax whatsoever there. The 100% allowance that the Irish subsidiary gets allows it to write down all of its profits which derive from that intellectual property for the next decade or so. It is quite extraordinary. Can the Minister explain how it happened? Why was that decision made in 2014?

Deputy Paschal Donohoe

I have already explained to Deputy Doherty that it moved to 100% because it was felt at that time that this would be a way of treating intellectual property that was consistent with how it was being treated elsewhere. On the question of contact between the Department of Finance and Apple, it is obvious that this was a number of years ago and predates my arrival in the Department. I will consult my departmental officials on the matter to see how contact can be established. The one principle I want to be absolutely clear on is that Ireland does not set its tax policy on the basis of any particular company, such as the company mentioned by the Deputy or any other company. We base our corporate tax policy, like all tax policies that are relevant to parts of our economy, on what we think and judge to be the right thing for the economy and for the taxpayer overall. We do not make tax policy on the basis of what any particular company wants or needs.

Deputy Richard Boyd Barrett

It does not look like that. This is why the EU is very suspicious, yet again. We have already been told we should have collected €13 billion of tax that we did not collect. The Government has still not taken that money and the interest off Apple and put it in an escrow account. As soon as there was movement on that particular tax avoidance strategy, lo and behold, we made changes which ensure Apple does not pay a single cent more than it was paying previously.

Not a single cent. it is perfect restructuring, almost to the euro. It involves the Channel Islands and the changes in the intangible asset allowance. It works out so perfectly that companies do not pay a single extra cent in tax. Their spin is that they did not pay any less tax - brilliant. They did not, however, pay any more tax; they paid exactly the same amount of tax. With regard to their tax liability, the net effect of closing down the double Irish is zero as they do not pay any more tax. This company is nakedly avoiding tax. Was the Minister aware of this and will he acknowledge that this is what these companies were and are doing? We might quibble about what the Minister did or did not do, but the reason there had to be movement against the double Irish is that these companies were just nakedly and rampantly seeking to avoid paying tax. What they are doing is immoral; companies are looking around for tax jurisdictions and loopholes in our tax code so they pay no tax. We say it is nothing to do with us, it is inconsistencies between tax codes and there is nothing we can do about it. Yet, Ireland seems to facilitate these companies. First it was with the double Irish and when a light is shone on the double Irish we then, coincidentally, facilitate them in a new way. We may have done it inadvertently. Is that the explanation? Inadvertently, the change that was made in 2014 perfectly succeeds in doing exactly what Apple would want to do, given that there was a problem developing with the double Irish tax avoidance strategy. This is too much of a coincidence. Does the Minister believe that anybody who looks at this would not say it is too much of a coincidence? The net result is that these companies do not pay a single extra cent in tax. How convenient. Does the Minister not believe that the European Union and Commissioner Vestager have some justification for being suspicious of this and that anybody looking on would say "Jesus, that stinks"?

Deputy Michael McGrath

Looking at the figures, the change that lifted the cap from 80% to 100%, made in the Finance Act 2014 which came into effect in 2015, has had a staggering impact. Seamus Coffey's online blog makes for very insightful reading. In 2014, when the 80% cap last applied, €2.6 billion of capital allowances were claimed under that regime. In 2015, when the cap was increased to 100%, €28.9 billion was claimed for capital allowances under that regime. This is a more than tenfold increase in the amount of capital allowances claimed in 2015 over 2014. Presumably, this is directly linked to the change of the cap from 80% to 100%. Figures from the Revenue Commissioners show there was a €26 billion increase in intangible asset related gross trading profits in 2015. There was a dramatic change in the onshoring and the claiming of capital allowances against intangible asset related income. Does the Minister have data on how much intellectual property, IP, was actually onshored since the change came into effect in the Finance Act 2014? We need to tease out what is there with regard to stock, IP and related capital allowances since that period of time. A while ago the Minister said that the corporation tax system should be certain and predictable. Up to 2014 he had the 80% cap then he removed that and it became 100%. Now, less than three years later it is going back to 80%, but all the IP, which was onshored in the intervening period, will continue to benefit from the 100% set-off around the limit on income; it can be offset by the capital allowances and the IP. Will the Minister give the committee the data he has on the IP that was onshored so we can tease out, from a tax point of view, the consequences of treating the capital allowances associated with those?

Deputy Paschal Donohoe

With regard to the different points that have been put to me, I reiterate what I said to Deputy Boyd Barrett. We set our tax policy, be it corporation tax or any other policy, on the basis of what we judge to be the right thing for the economy overall and the long-term interests of the Irish taxpayer. Across the period in which we have made decisions like that, we have seen an increase in corporate tax receipts overall. This point is missing in the analysis that is being offered here. In 2014 corporation tax receipts were €4.6 billion. They grew to €6.9 billion. For this year we are currently expecting corporation tax receipts of €8.3 billion. We are collecting more corporation tax at the moment. One of the factors in this is changes that have been made over the last number of years in how we structure our corporate tax policy.

I have been asked how we can handle IP that moved here in the past. Again, I will emphasise two points. We are talking about the timing in which depreciation reliefs are run down. Overall this makes a big difference to the timing in which tax is collected. It is a timing issue around when we actually collect tax from companies. Alongside that, while much of the debate here is focused on a particular company, I have to consider that this is a tax policy I would have to set for every company located in Ireland. I would have to say to every company that has an intellectual property asset, regardless of its form, that Ireland would change how it taxed the assets the company had moved here in the past. It was my judgment, and my decision, that a policy such as that would undermine the predictability at the heart of our corporate tax offering, and which is essential to its competitiveness with all the change that is under way now.

Deputy McGrath asked about figures and I have some of them. I have the figures relating to the corporate tax reliefs that have been claimed but I believe the Deputy already has those. The other figures that I have available to me from our national accounts relate to the purchase of patents, which is part of the movement of intellectual property assets. Those figures are as follows: in 2014 it was €1.9 billion; in 2015 it was €8.3 billion; in 2016 it was €35 billion; and in the first half of 2017 it was €11 billion.

Deputy Richard Boyd Barrett

When the Minister says that Ireland's corporate tax revenue has increased he forgets to mention the extraordinary rise in profits during that period. The percentage increase in profits far outstrips any proportionate increase in tax revenue. For example, 2012 pre-tax trading profits were €76 billion. By 2015 these had gone up to €149 billion. As we know, and we can surmise, a vast amount of that is attributable to these companies' enormous and spectacular increase in profits that are beyond belief. A doubling of aggregate corporate tax profits is overwhelmingly attributable to a small number of companies.

Just as those profits go through the roof we give them extra tax allowances to ensure that there is not a commensurate increase in the proportion of tax that we will get from them. I accept that there is some increase - how could there not be - when profits increase to that extent. Proportionately, however, the effective rate is going down not up. It is actually going down and it is already pitifully low.

In addition, the effective rate as against the total profits is actually falling for these companies because of measures that we are taking or our failures to close down these loopholes. In doing that they are robbing this country of tax revenues that we should be getting. They are also robbing people all around the world. All of the tax and global justice groups say this kind of behaviour that Apple, Facebook and Google are engaging in is the major contributory factor to growing global inequality, poverty and deprivation. These people are robbing us blind in a deliberate, naked and explicit drive to ensure that they pay no taxes whatsoever.

The Minister has not really answered the question as to whether he finds that morally repugnant. Is the Government bothered by that? The signs are, given the behaviour of the Government, that it does not find it repugnant but in fact at best turns a blind eye to it and at worst is actively colluding with it. Deputy Doherty and I have both set out the chain of events where very serious questions are now also being asked by the European Union about what happened and why it happened. We also need to know about the lobbying and the interactions that this Government had with Apple and with any of these other companies.

The one aspect on which I will agree with the Minister is that this is not about one company, although there is definitely one favoured company that is leading the charge. It concerns a few companies, a very small number. It is maybe five to ten companies who accrue these massive tax benefits because of the regime that we have and the changes that we made in terms of the window we created for them between 2014 and now. The move to reintroduce the 80% rate is closing the door after the horse has bolted and followed the massive onshoring of these assets. That allows those companies to pay no tax for a decade ahead against these enormous profits. It looks like collusion. Their behaviour is certainly immoral. Does the Minister agree that it is immoral?

If the Minister does agree that it is immoral, why do we not capture the additional tax benefit that these companies have accrued as a result of the change from the 100% to the 80% going back to when that change was made? Why do we not do that if we think it is wrong? I do not see how anybody could say what they are doing is not wrong. Why do we not do it? Is it because we made an agreement with them? Is it that we gave assurances to Apple and a few others at the time that we are going to allow them to do that? Otherwise, I do not see why we would not do it. Many people, and not just the left and Sinn Féin, are saying that the window they were given should be closed and we should recover that 20% difference which resulted from the changes in 2014 and, in the process, get the €800 million or so that would accrue if we did that.

Chairman

I call on Deputy Doherty before the Minister.

Deputy Pearse Doherty

Section 21(1)(a) clarifies the issue of a traded company and what would be treated as a relevant trade. Can the Minister speak as to what effect this will have on certain companies? Why is this clarification needed and will it capture people now or require them to pay more tax or how will it work?

Deputy Paschal Donohoe

That is section---

Deputy Pearse Doherty

It is set out in section 21, which is the amendment to section 291A of Principal Act (intangible assets) where it states:

(1) Section 291A of the Principal Act is amended—

(a) in subsection (5), by inserting the following paragraph after paragraph (b):

“(c) Where the trade of a company consists wholly of the carrying on of relevant activities (within the meaning of paragraph (a)), then the trade shall, for the purposes of subsection (6), be treated as a relevant trade.”

Deputy Paschal Donohoe

I will get clarification on that point in a moment.

With regard to the points that Deputy Boyd Barrett put to me and my views on large companies and corporations and the tax that they should pay, I believe that they should pay their fair share of tax. We will have differing views regarding what that level of tax could be because of potentially differing views regarding those companies and the role they play. However, I strongly believe that they should pay their fair share of tax. That is why I am committed to putting in place the different measures that form part of the OECD work that is under way and having them enacted in the Irish tax code. It is important that we all move in a co-ordinated way across the world to make sure that opportunities do not exist for companies to avoid paying their fair share of taxation. I strongly believe that to be the case and that is one of the reasons why I am committed to the OECD process and one of the reasons why in the Finance Bill I am seeking to make progress in that area.

No. What it affects is the timing upon which the allowances could be drawn down. So, at a point in time, when the depreciation reliefs that are available are gone, the Irish State will receive more tax. What I am trying to do here is smooth out the tax in income that will be available to the State over a longer time period to make it more sustainable. It is my assessment that moving to an 80% rate will allow that to happen. As opposed to us receiving a large amount of additional taxation at a point in the future, granted this assumes that companies still exist, as opposed to us moving to that scenario where there is a big amount in the future and nothing in between, I am trying to get to a point where we can smooth out the tax revenues that are available and post some of that forward. The provision is not going to affect the total amount of tax liability that is available to the State over the lifespan of the asset.

Deputy Michael McGrath

That is based on the pretty big assumption that stability applies in this area and that all of these companies will continue to accrue profits and will continue with the existing tax structure. There is a lot of uncertainty concerning the question of it just being a timing difference. If one assumes that everything continues as it is then one would be right that it is a matter of timing. However, there are a lot more moving parts and this matter is moving so quickly.

Deputy Paschal Donohoe

Yes, there are many moving parts. It is my assessment that a further moving part, that we would move to, would be if we were to make a kind of change that looked backwards. It is my view that such a move would have an effect on our ability to retain investment, jobs and all of those things in our country and, therefore, corporate tax policy, and the certainty of it, is so important.

In terms of the Deputy's concerns about the presence and diversity of different companies in the future, I will reiterate the following. Some of the companies that we have talked about have been based in Ireland for a very long period. We are talking about a corporate tax stream that has grown. I do not believe that it will continue to grow at this rate in the future although I cannot be certain. Mr. Coffey, in his report on corporation tax, made the point that he believes our revenue streams, as projected at present, will be stable up to 2020, which is quite an horizon to have available to me in terms of making an assessment like this one.

Deputy Michael McGrath

But it is not in the workout of capital allowances. How many years do capital allowances for IP last?

Deputy Paschal Donohoe: It depends on two different factors. It depends on how the company accounts for it and that, in turn, affects the length of the depreciation period. I think there is also another standard accounting period available.

Deputy Richard Boyd Barrett

For how many years?

Deputy Paschal Donohoe

It is 15 years.

Deputy Michael McGrath

Up to 15 years.

Deputy Paschal Donohoe

Up to 15 years.

Chairman

We will now go into private session to deal with the issues raised.

The select committee went into private session at 8.47 p.m. and resumed in public session at 8.50 p.m.

Deputy Pearse Doherty

I was asking a leading question about subsection (1)(a). The point is that section 21 of the Act has two subsections. Subsection (1)(a) has been explained as an insignificant tidying-up exercise but it will nonetheless be applied from 8 May 2009. The principle of retrospection, therefore, is included here. The Minister's decision not to apply the capital expenditure for the intellectual property that was onshore up until now does not stand up to rigorous testing. I understand that the Minister wants to give certainty and so forth but it is a certainty to companies like Apple that they will continue to be able to write down their tax liability for several more years. We are only starting to see the tip of the iceberg that is the Paradise Papers and I have no doubt but that we will see more of a spotlight being shone on tax structures.

I want to return to the issue of lobbying. Are the Minister and his officials aware of the lobbying that took place when the Government changed the threshold from 80% to 100% in 2014? Will the Minister inform the committee of this? Will he give a commitment, if he does not have the information to hand, to inform us of all of the individuals, groups and representative bodies who lobbied the Department, the Minister and the Ministers of State on this issue, either directly or indirectly? We already know, for example, that during this very period the American Chamber of Commerce Ireland was lobbying the Department for the threshold to be increased. I do not know if Apple is a member of the American Chamber of Commerce Ireland but I am sure that it has the interests of Apple and companies like it at heart. That chamber lobbied as part of its pre-budget submission in 2015 for the threshold to be increased. What is interesting is that it only asked for it to go up to 90%, whereas the Government went the whole hog of raising it to 100%. We also know that the Department was lobbied on the onshoring of intellectual property as a result of the change to the tax residency rules. We know that the Minister himself was lobbied by the American Chamber of Commerce Ireland with regard to tax changes. I would like him to inform the committee now if any of this concerned the threshold and the date from which it would apply. Was there any discussion of that when he had a meeting with the American Chamber of Commerce Ireland? Will he also put on the record if he or his officials have had any other meetings with representative groups with regard to any aspect of this issue? Did the Department notify, engage with or seek the opinion of any of these companies? I do not mean directly with the companies themselves, of course, as we know how these things work and it is usually through legal representatives. Did the Department seek advice from bodies outside of the Department with regard to the application of this section?

Deputy Paschal Donohoe

In response to Deputy Doherty's direct question, this matter did not come up at my meeting with the American Chamber of Commerce Ireland and I certainly did not seek the chamber's view on it. We had a wide-ranging discussion on a number of matters, but not on this particular issue. I have not had meetings with any companies on the matter and I have not met any company or individual on this matter, outside of the standard work that I would carry out on this. I obviously met Mr. Seamus Coffey, chairman of the Irish Fiscal Advisory Council, I had many meetings within my own Department on this matter, and I also sought the view of other Departments with regard to the Coffey report and what I was considering doing. When it comes to the contacts that my officials have had both now and in the past, I am certainly not in a position to speak about what happened several years ago because, as the Deputy has acknowledged, I was not in the Department at the time. I will ask my Department to see what records are available for the periods in question, although I am sure the Deputy may have got access to them through other means. I will come back to the committee when I have an answer to this.

Deputy Pearse Doherty

I wish to advise that I will be bringing forward an amendment to section 21 again.

Question put and agreed to.

Chairman

Before we move to amendment No. 41, we will suspend for a vote in the Chamber.

Sitting suspended at 8.55 p.m. and resumed at 9.27 p.m.

NEW SECTIONS

Deputy Richard Boyd Barrett

I move amendment No. 41:

In page 39, between lines 7 and 8, to insert the following:

“22. The Minister shall, within 3 months of the passing of this Act, bring a report on the amount of tax revenue foregone as a result of the changes to capital allowances relating to intangible assets made in Budget 2014 and the re-introduction of the 80 per cent cap in such allowances in Budget 2018, the reasons for the Budget 2014 changes and the additional revenue that would be generated by applying the 80 per cent cap for the time prior to 11 October 2017 where the allowance was 100 per cent.”.

This amendment deals with a topic that we have already discussed at some length about the changes made to the capital allowances allowed on intangible assets in 2014 and the enormous tax benefits they conferred on a small number of companies, notably Apple among others. We have made the point. To paraphrase the Minister, he said the Government does not gear its tax policy around any particular company. That is probably true because I think it was more around a group of companies. The Minister did refer to sectors of industry. I think it was a group of companies that benefitted from this. We are all familiar with names such as Apple, Google, Facebook, Amazon and a few others. I believe that whether it was through direct lobbying or just the servile attitude that successive Governments, not just that of which Deputy Donohoe is a part, but previous Fianna Fáil Governments, have shown towards those companies, they just want to do anything they can to please them and that means tailoring the tax code to suit their purposes.

We have had the discussion so there is no point in labouring it. We clearly disagree on this issue. However, I take issue with the argument the Minister made about what would happen were we to go back and close the window that was opened for them in 2014, which the Minister is only closing now after all the intangible assets have been onshored and where they will derive the tax benefit of paying no tax on the income from those assets for up to 15 years.

I take issue with the argument the Minister makes that, were we to go back and close the window that was opened for these companies in 2014, and which he is only closing now after all these intangible assets have already been onshored, and where they will derive the enormous benefit of paying no tax on the income from those assets for up to 15 years, many other people might be affected where there might be a legitimate basis for their expectation to benefit from that change.

I do not know how the Minister does not draw a distinction between a company that might actually purchase an intellectual property asset, where it is a genuine cost on the company, and a company that is clearly doing this as an accountancy exercise, where it is not a cost on the company because it is buying the asset from itself and has set up a network of companies purely for the purposes of minimising its tax liability and benefiting from these kinds of allowances. I just do not see how the Minister does not draw the distinction and why the tax code cannot so do. Of course, if there are legitimate costs for a business, it is reasonable that it should get an allowance on those costs against its trading profits to reduce its tax liability. However, this is a case of Apple, Google or Facebook moving around assets between its own subsidiaries in order to manipulate the tax code and reduce its tax liability. Everyone knows that, the Minister knows it, and we have known it since long before 2014 and the onshoring of these assets. All of the tax avoidance that has been engaged in by these companies centred on similar types of manoeuvres around intellectual property and payments of one subsidiary to another, whether from stateless subsidiaries that were incorporated here but not tax-liable here or subsidiaries that are no longer stateless but are located in Jersey, where they do not have to pay tax anyway, so it is the same difference. It is the same type of tax avoidance strategy and it is one company doing it. Therefore, I do not see how they can in any sense be deemed legitimate costs. It is just a way for such companies to reduce their tax liabilities on their absolutely staggering profits, and they are literally writing their own tax bills. They are deciding how much tax they will pay, not the Government, the tax code or the nominal tax rate. None of that actually determines how much tax they pay; they decide how much tax they pay through a manipulative accountancy exercise. I do not see how the Minister deems that to be legitimate and, as I said, why he cannot draw a distinction between companies that clearly are engaged in tax avoidance and companies that might actually have a legitimate claim on an allowance.

Deputy Paschal Donohoe

For the purpose of being clear about how this issue is dealt with, I must inform the Deputy that there are a number of ways in which section 291A is structured to try to make sure it is not used for tax avoidance purposes. I will list the key ones, given the claims the Deputy has just made. Relief is available only where a company is carrying out a bona fide trading activity in respect of the management, development or exploiting of intangible assets. Relief is not available in respect of any expenditure incurred as part of a tax avoidance scheme. Under the scheme, allowances can only be offset against income of development trade in which the intangible assets are used, not against any other profits. An arm's-length rule applies, ensuring that the correct amount of income expenditure is attributed to the relevant trade and to prevent excessive relief being claimed. Finally, provision is made for Revenue to engage an expert to assist in the determination of arm's-length values where necessary, and the Revenue Commissioners keep these measures under review all the time to make sure they are operated as intended.

Deputy Richard Boyd Barrett

That is not very credible because the parent company is deciding how much one subsidiary will charge the other for the use of the intellectual property. It may be the case that the profits then derive, as the Minister says, from that piece of intellectual property, but the parent company is deciding how much one charges the other and is setting the cost at precisely the level that is necessary to ensure that it pays no tax. That is what these companies are doing, and we all know it, so it is a tax avoidance strategy. As the Minister said, our tax code - I cannot remember the exact section - actually refers to not allowing, or prohibiting, things that are very obviously tax avoidance tactics. This, to my mind, is very obviously just that, and everyone knows it is, but we allow it. I do not see how the Minister can stand over it, frankly, but-----

Chairman

Is the Deputy pressing the amendment?

Deputy Richard Boyd Barrett

Yes.

Amendment put and declared lost.

Deputy Richard Boyd Barrett

I will bring it back on Report Stage.

Chairman

Amendments Nos. 42 and 46 are related and may be discussed together.

Deputy Richard Boyd Barrett

I move amendment No. 42:

In page 39, between lines 7 and 8, to insert the following:

“22. (1) The Minister shall, within 6 months of the passing of this Act, bring a report on the potential to raise additional corporation tax revenue by closing down tax loopholes, examining the extended legitimacy and abuse of all corporate tax expenditures, exemptions, allowances and deductions, such as losses forward, R&D tax credits, the Knowledge Development Box, intra-group transactions, allowances on intangible assets and establishing a minimum effective tax rate of 12.5 per cent on gross trading profits and incomes.

(2) The Minister shall, within 6 months of the passing of this Act, bring a specific report and comparative study on the relative social and economic benefit of research and development tax credit expenditures, benefitting private corporations as against the investment of the equivalent funds into research and development in public universities.”.

We dealt with a specific allowance and a particular set of circumstances around the changes made in 2014, but this amendment relates more to the bigger picture of the whole array of allowances, deductions and reliefs available to corporations. It is worth saying the same groups we have just talked about are the major beneficiaries of this: the Apples, Googles and Facebooks and probably the pharmaceutical companies and so on. A relatively small number of companies benefit from this vast array of allowances, deductions and reliefs. What we seek in moving this amendment is a really detailed look at these, with a view to trying to close down all these loopholes that are being exploited to reduce the effective rate being paid by a small number of corporations. I think the vast majority of small and medium-sized enterprises in this country do pay in or around the 12.5% because they cannot for the most part utilise many of these reliefs. It is the big players, the favoured, pampered few of these extraordinarily profitable corporations, that are the big beneficiaries and have the accountants, the consultants and the lawyers and so on to maximise the benefit they derive from all these reliefs. The scale of the tax benefits they derive is quite extraordinary. We have talked about the intangible assets. Another one I came across looking at Revenue's list of these reliefs and allowances is the one entitled intra-group transactions. I would not mind hearing a little more about this one, which was a relief that cost the Exchequer €2.9 billion in 2015 and €9 billion in 2016. Again, it is one of these reliefs where we see a staggering increase over one year.

If the officials want the document to which I have referred it is the second page of a Revenue document titled Cost of Tax Allowances, Credits, Exemptions and Reliefs. It details the various reliefs. Losses, including capital allowances brought forward from earlier years, were mentioned earlier, and account for €2.7 billion; group relief costs, €254 million; research and development tax credit, €700 million; and capital allowances totalling €6 billion. The total of these, when we add them all up and set them against profits, is extraordinary. Mr. Seamus Coffey remarks on this in what is a very good paper. As I have said before, I do not agree with his ultimate conclusions, as I do not think they are radical enough. However, he comments on the enormous increase in these deductions and allowances. He writes that they have increased from €18.9 billion in 2003 to €97 billion in 2015. Those are all tax loopholes that a small number of corporations benefit from. I repeat, the increase is from €18.9 billion to €97 billion, an extraordinary jump by any standards.

If the small and medium enterprises are for the most part actually paying the 12.5% rate, this explains how a small number of corporations benefiting from these reliefs have actual effective tax rates of 1%, 2%, or in some cases less than 1%. At the same time, their total aggregate profits, as I mentioned earlier, have gone from €76 billion in 2012 to €149 billion, more than doubling. There is no doubt that this doubling of profits is attributable to the same small group of companies. Yet the tax that we get from it does not double. If gross trading profits double over that period, then one would think our tax revenue would double. Yet that is not the case. The increase is from about €4 billion to about €6 billion. That is a 50% increase in corporate tax revenue, roughly speaking, but there has been more than a 100% increase in profits in that period. How does one explain that? It is explained by the fact that we have had this dramatic increase in allowances, reliefs and deductions.

Do the members not think we should do something about that, and move towards some sort of minimum effective rate so that these players would be forced to pay a fair contribution in tax, rather than doing what we are doing at the moment? If I give the best interpretation of what the Government is doing, it is chasing them around, trying to catch up with them as their lawyers and accountants engineer ever more imaginative and innovative ways to get around and exploit the tax code, to open up loopholes and so on. That is the most benign explanation of what is happening.

However, I believe it is worse than that. I think there is collusion. Even if I am wrong, surely the way to deal with it, to stop this behaviour, to stop this exploitation of loopholes and to make these people pay a fair proportion of their enormous profits in tax, is to introduce some sort of minimum effective rate. I would go further. I would do that and raise the nominal rate. I know that would be unthinkable for the Minister but could we not at least introduce a minimum effective rate, so that they actually pay the 12.5%?

These companies would still be making staggering levels of profit. I do not believe they would leave the country if we did that, because even if they actually pay the 12.5% they would still be paying significantly less here than they are in most jurisdictions in Europe, at least in western Europe, which is where they want to be. I am sure they want to be in English-speaking western Europe, so our real competition for a lot of this investment is probably only Britain and Scotland.

Would that not be a fair and reasonable thing to do? Would it not be fair and reasonable, as this amendment suggests, to at least look at all of these allowances and deductions, examine how they are being exploited by these corporations, and look at ways of trying to increase the tax take from them?

Chairman

Deputy Doherty, amendment No. 46 is yours.

Deputy Pearse Doherty

Go raibh maith agat. My amendment is different, but it captures some of what Deputy Boyd Barrett said. It focuses specifically on the research and development, R&D, tax credit. I believe there is a value to the R&D tax credit. I am not arguing for it to be abolished but I am concerned about the way it is set. I am concerned about the fact that it is out of control and that the cost of this tax credit is increasing dramatically. We need to do something about it. It needs to be reformed. We see that the cost of the tax credit in 2010 was €224 million, yet five years later it went up to €708 million. That is a huge increase in a tax credit.

We also see that the number of companies availing of the tax credit has actually decreased, particularly in the 2013-15 period, when the tax credit increased by €300 million. We know from the data provided by the Revenue and from the independent analysis that ten companies are currently claiming two thirds of the credit. Some €460 million of it is going to ten companies. We also know that €283 million of it is dead weight, that is, research and development worth €283 million would have been carried out anyway. In any type of tax credit there will be a portion of dead weight but 40% is on the high end.

I know the Government is not there to please me but I do not think it is a good practice to release a lot of these reports on budget day. A case in point was the help-to-buy report. I do not think there was anything in that report that could have affected the market, and it could have been released a week before. This review of the tax credits is another example because there is so much information surrounding it. It is good that there is so much information in the budget documents but when reports like that are published online on that day they sometimes do not get the attention they deserve. The evaluation was not a full evaluation or a cost-benefit analysis, and that is something that should be done on the R&D tax credit. It did recognise that the relief is reasonably successful but it notes that this must be immediately qualified by referring to the notable dead weight associated with this unrestricted fiscal incentive and it goes on to refer to the 40% dead weight.

One of the key things that jumped out at me is that when this report was done, the cost of the tax credit for 2015 was not known. At the end of the conclusions it suggests, as another approach, lowering the tax reduction to firms that need a break. The report notes that the value of outstanding credits in 2014 was €592 million and given the size of this future liability to the Exchequer, it recommends considering how to prevent it from increasing even further in the future. The authors go on to suggest a number of ways in which that can be done. In 2014, the figure was €553 million, yet within a year it jumped to €708 million. God knows where it was in 2016, and indeed 2017, but on this basis we could be looking at a billion-euro tax credit very soon. The problem here is that two thirds of it is going to the top ten companies, so it does not reach small and medium enterprises. Indeed, the report refers to the fact that younger companies are not benefiting from this and it refers to a wait-and-see approach. That is not good for younger companies.

We have a scheme that is not working and is costing a lot of money. The number of companies that are availing of it is shrinking, yet the cost of it is increasing and there is significant dead weight.

While 40% of dead weight might be acceptable in a lower-cost scheme, when the dead weight is at over €250 million, we have to ask about the structure of the tax credit. My amendment therefore calls for a report within six months setting out the specific actions to be taken to reform the research and development tax credit, reduce the cost of the credit, stop abuses relating to inflated claims and make the credit more appropriate for SMEs. I refer to abuses because there appears to be a mismatch between the CSO data and the data provided by companies. That could be the result of an inflation of research and development for the purposes of gaining the tax credit. That is something that would need to be teased out. I am not asking the Minister to amend this now as I do not really know how to do that. There is a report already which has provided a number of suggestions. We need to signal the fact that there will be changes to the research and development tax credit, in relation to which the Minister needs to carry out a proper and full cost-benefit analysis, as suggested. It is time to look at implementing some of the recommendations suggested.

Deputy Richard Boyd Barrett

I did not speak to the second part of my amendment and I want to say one brief word to put it all together before the Minister comes back in. This is specifically on the research and development tax credit. I am asking the Minister to consider whether the amount of money which has been given in a tax allowance for research and development to a very small number of corporations, as has already been said, would be better spent on public universities. The debate is often framed as follows. If one is against research and development credits, one is claimed to be against innovation and research and development. I am very much in favour of research and development but there is an opportunity cost in giving the funding to private companies through tax expenditures because that money is not going to public universities. There would be a lot more benefit and advantage for the domestic economy if that happened. I refer to the real Irish economy as against the economy that exists around a tiny number of multinational corporations, which could be gone at any point and that get far more from us than we get from them. We should look at which approach would provide a greater benefit to the Irish economy and society as a whole. Is it to continue with this very large tax expenditure which benefits private corporations or is it to provide that money for research and development in our public universities? I ask the Minister to address that point.

Deputy Paschal Donohoe

Before I do so, I have been asked to refer two matters to the committee. This will take only one moment to do. First, I have been asked by the Revenue Commissioners to clarify a comment made during the earlier discussion on REITs. REITs do not get a tax deduction for local property tax. REITs pay a dividend out of the profits available for distribution and the shareholders are taxed on the amount received. I think there was an exchange earlier that may not have given that point the certainty it needed. On another matter relating to section 8 of the Bill, my officials have advised me that a technical amendment may be required to make the section work as intended. I am signalling that I may need to bring such an amendment forward on Report Stage.

On the amendments proposed by Deputies Doherty and Boyd Barrett, I note that the Irish corporation tax regime contains a small number of specifically targeted tax reliefs, the focus of which is on the creation of additional employment, as is consistent with current Government policy on innovation, with a view to generating high-value-added economic activity in the country. Some other countries have a high headline rate of corporation tax which is supplemented by a high number of tax reliefs which reduce the overall rate of tax paid. In contrast, our approach to this tax is clear. We have a competitive headline rate of corporation tax which is applied to a broad base. The amendments relate to a number of different areas which I will address individually.

Under existing loss-relief provisions in the Taxes Act, any unrelieved trading losses of a company for an accounting period may be carried forward for off-set against trading income of the same trade in a future accounting period. 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, as it is in all other OECD countries. The carrying forward of unrelieved trading losses is a usual feature in other tax jurisdictions.

The central purpose of the knowledge development box, or KDB, is to encourage companies to carry out their substantive activities in Ireland. The KDB is based on the modified nexus approach which was designed by the OECD as part of the BEPS project and is not designed by tax planners seeking to design complex tax avoidance structures. By adhering to the rules, the KDB is a positive measure for Ireland which is focused on incentivising substantive research and development and encouraging companies to bring in real operations and high-quality jobs that have a positive impact on the Irish economy. The research and development tax credit is also a very important feature of the Irish corporate tax structure. The central purpose of the tax credit is to encourage companies to undertake high-value-added research and development activity in Ireland, thereby supporting jobs and investment here. Reflecting these considerations, the Government's innovation 2020 strategy aims to achieve the EU 2020 target of increasing overall, i.e. public and private, research and development expenditure in Ireland to 2.5% of GNP by 2020.

A review of the research and development credit was carried out by my Department ahead of budget 2017. It concluded that the credit was responsible for 60% of the research and development being conducted in our country. This is considered to be a reasonable level of additionality. The bang-for-buck ratio is estimated to be 2.4:1. That means for every €1 in foregone tax revenue, €2.40 in additional research and development is being conducted. This is also considered a reasonable result. Overall, the paper's findings suggest that the rationale for the research and development tax credit is not in question. Firms have clearly responded to it by increasing their research and development. My officials and I are conscious of the need to evaluate the research and development tax credit regularly, but it is important to recognise that while this is a significant credit, it is one of the few tax credits in our corporate tax code compared to other jurisdictions. However, I am mindful of the need to monitor the cost of this tax credit and will continue to do so in line with the Department's tax expenditure guidelines.

In line with the established practice of carrying out periodic reviews of key areas of tax policy, a review of Ireland's corporate tax code has recently been undertaken. The review made 18 substantial recommendations which we are now working to implement. Ireland has taken a number of steps towards implementing the BEPS recommendations, and the review sets out a road map for the State to create certainty on the implementation of the recommended measures. These include the launch of a consultation process which is now under way. Therefore, I do not accept the proposed amendments.

One of the points raised during the contributions of the Deputies related to the discrepancy between the Revenue Commissioner and CSO figures. According to the CSO, total business expenditure and research and development, which is referred to as "BERD", was provisionally estimated at €2.1 billion in 2014, of which €200 million related to capital expenditure. Initial Revenue tax returns indicated a 2014 figure of €4.6 billion, with no capital expenditure subtotal given.

In 2014, at that point a broad definition of Research and Development was still in operation in the Revenue guidelines. The Revenue Commissioners have now confirmed that the initial figures, including carry-forward tax credits, resulted in a double counting of the eligible expenditure. Further data provided by Revenue, removing the influence of the carry-forward credits indicate there is not a substantial difference between the Revenue's estimates for gross expenditure linked the Research and Development tax credit and the CSO's BERD. In regard to the cost and why it keeps increasing, the costs of the scheme have continued to rise and the most up-to-date figure is €708 million with 1,535 claims. It has risen from €282 million in 2012. However, between 2012 and 2015, the base year threshold of the research and development tax credit was phased out and ultimately removed. This entailed that all relevant expenditure could qualify for the tax credit, where previously qualified expenditure for research and development was only that in excess of the expenditure incurred in 2003. In other words there was a change in the base year which, in turn, had an effect on the cost, which increased the following years.

I am aware that this is one of the few credits we have in our corporate tax code and that is in contrast to other countries with which we compete. I am also aware of the fact that this is tax expenditure that is increasing and has increased significantly. While I can point to plausible reasons as to why this has happened, it is reaching a very large and even larger figure and I will monitor further growth in that figure carefully across next year.

Chairman

Are the amendments being pressed?

Deputy Pearse Doherty

That is a disappointing response. I think the Minister is ignoring some of the points made in the report. The report states that it is pertinent to ensure that this does not increase. After the publication of the report we find out that it has already increased by another €150 million. The Minister is also ignoring the recommendations in the report about multiple claims and the fact that it does not affect younger firms.

My amendment is very simple. By the time we return next year to consider the finance Bill the research and development tax credit could be worth €1,000 million. In my amendment I request the Minister to report on action to be taken to reform the tax credit. It needs to be reformed as fewer companies are availing of it and younger companies are not availing of it. It is completely out of control. The rate of increase is €150 million a year. We argued the toss of €10 million here and €10 million there, but this is similar to the Minister spending this amount of money.

It is disappointing that the Minister will not accept the amendment. I see the value in research and development tax credits. It is important for companies to have that tax credit. It is also important for the certainty of research and development but we have to do something about it. The Minister has given no commitment to a review of the tax credit. The report that he published on budget day last year called for further analysis on it. There was no cross-benefit analysis and it referred to simpler ways for analysing it. I will come back with an amendment on Report Stage but I encourage the Minister to look again at that report and come back with a substantial amendment.

Deputy Richard Boyd Barrett

The Minister did not revert to the issue of research in universities and the bang for the buck that we derive from encouraging research and development through these allowances for private companies and, as has been said, the small number of big corporations that benefit from it. It seems to amount to the privatisation of research and development. The funding of our universities was hammered during the period of austerity. They lost approximately 30% of their funding. Would it not be better, rather than have this huge tax expenditure on research and development tax credits, to put more money back into our universities? Should we not at least examine which would be more beneficial to our economy and our society and examine whether this is good tax expenditure?

Deputy Paschal Donohoe

I already have plans to increase the level of expenditure in third and fourth level institutions. As Deputies know, I made an announcement that I am planning to increase the training levy by 0.1% per year for the next three years. For next year alone that will bring in an additional €36 million to €37 million that would be available for higher and further education in our country. I plan to increase that by two further moves afterwards. I have also made a very significant increase in funding that is available to the Department of Education and Skills. Granted, much of that funding is going into challenges that the Department must meet in primary and secondary education. That is the reason I have decided to increase the training levy in employers' PRSI, to create a funding stream that will go directly to third, fourth level education. I decided on a levy rather than a tax because if I introduced a tax I would not have the ability to divert it to that sector.

I largely agree with the Deputies on the value of research and development in our universities. To end on a final point of agreement, the research and development that takes place under this tax credit clearly has to have a commercial value to the company; otherwise it would not be happening. We link it into particular criteria. One of the reasons that I want to increase funding to universities is that there is a great value and benefit in research and development that does not have a commercial value. Our universities are the place where that should happen.

The select committee adjourned at 10.10 p.m. until 10 a.m. on Thursday, 9 November 2017.

Select Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht - Wednesday, 8 Nov 2017

Finance Bill 2017: Committee Stage (Resumed)

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Select Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Wednesday, 8 Nov 2017