The section extends for close companies the meaning of distribution. The purpose of the section is to secure that expenses incurred by a close company in providing certain benefits for participators are to be regarded as distributions where these benefits are not chargeable under the existing provisions for the taxation of benefits in kind and would, therefore, escape taxation. The section does not apply to expenses incurred in providing pensions and death and retirement benefits.
SECTION 96.
Question proposed: "That section 96 stand part of the Bill."
What kind of payments do you envisage?
It is really for any benefits. It could be a house, car, or any benefits which would not be caught under the benefits in kind—legislation which would apply to directors, employees and so on. The recipients of such benefits would be regarded as receiving distributions. Subsection (2) gives a description of what could arise.
Yes, I see that.
Some day in his more reforming moments perhaps the Minister would go through this legislation and get rid of that word " participator " completely and get something which does not offend my susceptibilities.
I thought the Deputy wanted me to define "entertainment".
Question put and agreed to.
SECTION 97.
I move amendment No. 30a:
In page 91, subsection (4), lines 35 and 36 to delete " 12 per cent per annum or such other rate of interest as the Minister for Finance may from time to time prescribe " and substitute " such a rate as the company would have to pay on similar borrowings from a bank ".
My amendment is fairly straightforward. The section, as the Minister puts it before us, restricts in the case of close companies the amount of interest paid to a director or his associate which would be the normal way of computing the profit for corporation tax purposes. The Bill proposes that the maximum interest which would be allowed would be that calculated at 12 per cent per annum on the amount of paid up share capital plus share premium, if any. This is much too restrictive both as regards the rate of interest and the maximum amount which would be allowed.
I would direct the Minister's attention to a situation where an entrepreneur with limited capital of his own to invest in a company by way of share capital might be in a position to get loan finance from a relative who might not want to invest in the form of share capital but would naturally require a commercial rate of interest. This is a common sort of situation and it is perfectly straightforward and genuine. The fact that only part of such interest would be allowable as an expense in agreeing on profits would be an undesirable penalty on future profits. My attack on the section is twofold: first, I am suggesting that instead of 12 per cent per annum “ or such other rate of interest as the Minister for Finance may from time to time prescribe ” it should be “such a rate as the company would have to pay on similar borrowings from a bank”.
The purpose of section 97 is to prevent an undue proportion of a company's profits being extracted in the form of interest rather than distributions. If an undue proportion were extracted there would, of course, be a consequential loss of revenue. It is not the intention of subsection (4) to prescribe an interest rate which might fluctuate upwards or downwards over a short period, as would happen if the rate were fixed by reference to the rate charged by a bank. The rate of 12 per cent is not a permanent one because subsection (4) provides the Minister may prescribe a rate from time to time. This would entail a periodic review of the rate fixed by the section so that the rate will permit a reasonable amount of interest paid to directors and their associates to be allowed as a deduction in computing corporation tax profits. Incidentally, to help to consider the appropriateness of the 12 per cent rate it is worth noting that the redemption yield of 30 quoted Government securities in the week ending 6th February last was 12.31 per cent. I am not certain what it is this week.
Is the Minister suggesting that the ordinary entrepreneur can borrow at the same rate as the Government?
He can borrow at varying rates now. The Minister for Finance may prescribe the rate and he will be doing this from time to time when he feels it is appropriate to do so in accordance with the interest rates being charged in the market. I do not think Deputy Haughey's amendment is sufficiently precise to be workable. There are various kinds of banks——
I accept that. I would not attempt to put it into legislation myself. I meant only to throw it forward as a principle.
This could often happen where a director—the largest director—in a close company might get a loan from a bank as an individual. The loan would not be given to the company. But the director, who was a large shareholder would know that the company was safe and he would be willing to accept the money as an individual. His rate of interest charge from the bank would be only 12 per cent. That would be very wrong because he could be at a loss.
Exactly. These are two situations. That is one I had not thought of but the other one is where an enterprising young man with a good idea has a rich relative who is prepared to back him but he wants whatever is the going rate of interest on his money which may be 14 or 15 per cent. Both parties would be penalised in this situation because, unless there is a change in the rate, he would be allowed to charge only 12 per cent; anything else would be disallowed in the company's accounts.
In my case it also happens that the banks want a director's signature rather than that of the company. They do not trust the company and they want an individual guarantee. It is a thing they do not often get nowadays. But the company would have moneys, sufficient security in the opinion of the director, but the bank might not think it was enough for an overdraft, but would one of the directors guarantee the loan being given to the company?
I think there is no disagreement between us as a matter of principle here. We all want to have a rate of interest which would be a fair rate. It is very difficult to pick which is the bank rate because there are different categories.
What would the Minister himself suggest?
Suppose we said 13——
That is reasonable. That covers present market conditions.
Mr. Ryan
——and retain the right to alter it up or down.
Would the Minister go a little further and give us an undertaking that it would be reviewed, say, every quarter?
If we got back to static interest rates which would vary only every five years——
I am only asking for an informal undertaking.
Obviously we will be looking at this very, very carefully. The Committee may take it that there will be a continual review of it. An executive of the Department of Finance looks at interest rates daily and I will ensure that this section is kept in mind.
The 13 per cent gets over Deputy Haughey's example but it does not get over mine. In Deputy Haughey's case his relation is going to get as good a return there as he will get anywhere else. In my case the person who is borrowing from a bank wants to give the money to the company. It is done by guarantee more often than not. The bank may prefer to give the money to an individual on his own account. The charge may be 14 or 15 per cent and all he will get in return from the company is 13 per cent. He will be down 2 per cent on the money.
That is covered in my next amendment.
It is an anti-avoidance measure.
I can see the reason for it.
We must bear in mind that the allowance of interest at a too generous level would encourage avoidance.
I see.
I think 13 per cent as of market conditions today is a reasonable rate of borrowing.
Is there no way the Minister could tie it up closer with the prevailing costs of money from a bank? Surely, they have their various categories tightly defined. Could it be geared to these prevailing rates? I can see the Minister does not want to penalise a person or put him in too favourable a situation but surely something similar to the practice of the banks could be adopted?
I have before me 12 bank lending rates which depend on category, whether one is A or AA, and on length of borrowing, for example, overdrafts, one-year term loans, and term loans for one to four years. There are many rates.
Whatever Deputy Dockrell can borrow at.
There are also rates at 13 per cent. He is in the AAA category at 10 per cent.
You are flattering me.
I should like the Minister to say that he would carry out a review every quarter, could he just give the Committee that informal undertaking?
That would be my intention but I do not want to give a commitment binding myself and my successors to carrying out a review quarterly because we could get back to very stable interest rates. The review itself could be no more than just looking at a sheet of paper and not making any decision or alteration. I would prefer to give an undertaking to keep this matter constantly under review and it will be done because interest rates are of crucial importance to the Minister for Finance.
Amendment, by leave, withdrawn.
I move amendment 30a (1).
In page 91, line 35, to delete " 12 " and substitute " 13 ".
Amendment agreed to.
I move amendment 30b.
In page 91, subsection (4), line 47 after " period " to add:
"Provided that the restriction will not apply to interest paid to an associate where it is shown that the loan was provided by the associate from his own resources or from personal bank borrowings".
I am prepared to withdraw the amendment.
Amendment, by leave, withdrawn.
Section, as amended, agreed to.