I would like to indicate my sympathy with those who argue that in genuine cases professional and service firms should be in a position to withhold certain profits to meet future obligations. I can startle the Committee with a number of examples known to the Revenue Commissioners which show that these services in professional companies have been used, and are still being used, for massive tax avoidance purposes under which people who are in the 77 per cent income tax bracket avoid payment of that and other taxes by leaving undistributed profits with service companies for several years and then liquidating the companies and cleaning out all the money without paying the higher rate tax at all.
I imagine the majority of the Committee would be with me in trying to close off practices of that kind. It is important to know that section 162 applies only to professional and service companies and not to genuine trading companies which generally tend to require more capital for trading stock and for capital investment and so forth, than a pure service for professional companies. Our approach has been on the basis that professional service companies will not require to retain a significant amount of profits for development purposes. One of the principal reasons for confining the section in this way was to avoid the necessity for the making by the Revenue Commissioners of value judgments, or giving to the Revenue Commissioners discretion as to whether the amount of profits given is necessary or advisable for the purpose of the company's business.
Deputy Haughey's amendment would involve a value judgment of that kind by the Revenue Commissioners. It would be imposing a responsibility on them which would be unfair and which, I think, they would say they are unfit to make. The exercise would probably cause untold disagreement between the Revenue Commissioners and the taxpayer. We must remember that the great element of good taxation is to achieve certainty. We would not achieve certainty if we had such a provision. Even if it were introduced it would necessitate the introduction of apportionment provisions in cases where there were funds which were not required for the development of the business. This would be likely to result in the imposition of a greater amount of total tax than would otherwise be the case.
The proposed surcharge, when taken in conjunction with the ordinary rate of corporation tax, results in a tax rate of 60 per cent on undistributed profits. If there were apportionment provisions in respect of undistributed profits where those profits were not necessary for the purpose of a company's business, as suggested would result from the method, the tax rate would be 82 per cent as against 60 per cent. For example, a company with a profit of £100 would have a corporation tax of £50, so there would be £50 distributable. The amount apportionable to shareholders would be £50. You would add a notional tax credit of £27; the income tax thereon of 77 per cent would be £59.29. You would deduct from that the notional credit of £27, leaving an income tax of £32.29. The tax on the underlying profit of £100 would be corporations tax £50, income tax £32.29, total £82.29.
I too have received the representations to which Deputy de Valera referred. Indeed, I was asked if there was any objection to the representations being sent to members of the Committee and I said no, that we wanted this to be a good, fair and acceptable Act when it was passed and, therefore, the more minds we could bring to bear on the legislation the better.
More favourable treatment is accorded under section 101 to companies carrying on ordinary trading activities than is accorded under section 162 to companies carrying on professional activities, because ordinary trading companies require substantial amounts of capital to finance stock and trade, plant and machinery, and generally to finance the maintenance and development of the business. This is not the case where professional activities, depending on professional skills and personal policies of individuals, are concerned. Such activities tend to involve smaller capital requirements than the generality of trading operations.
Many professional businesses, including those of chartered surveyors, are carried on by individuals and partnerships. Indeed, the ruling bodies of many professions, including the legal, medical and accountancy professions, do not permit their members to operate in their professional capacities and responsibilities through companies. We are trying to strike a balance between the people who are engaged as persons in these activities and those who are using companies. There is a vast difference between the treatment under the tax code for those who have not used the operational divice of those companies and those who have. Quite clearly there is no equity in a tax system if you allow that to continue without some kind of curb. Any delays occurring in relation to the payment of fees—a problem which is not peculiar to incorporated professional businesses—occurs to individuals or partnership carrying on professional activities.
I will give some examples that have occurred. I will give them suitable anonymity for obvious reasons but they will help to illustrate the magnitude of the problem. The cases which I quote refer to accountancy practices, chartered surveying practices, auctioneering practices and in some cases medical practices.
A company furnished an account for a recent year disclosing profits of £151,000. The unappropriated profit at the balance sheet date was £192,000. This was a few years ago and no subsequent accounts have since been lodged, but notice has been given that the company ceased business last year. The predecessor service company of the same concern ceased business in 1970, when £146,000 was distributed by that company to the partners of the firm by way of a bonus issue and a subsequent redemption. The following year a sum in the region of £90,000 was distributed to partners in the same manner by another such company. It seems likely that the accumulated profits I mentioned earlier in the hands of the company, together with whatever amounts have been accumulated by it since then, were also distributed " tax free " by way of a redemption or a bonus issue. In another case, a company had two directors and in the accounts ending in a recent year there was a net profit of about £17,000, and a charge of directors' fees of £8,000. The total of distributed profits amounted to £31,000; there were no dividends paid, but the two directors borrowed over £60,000 during the year, bringing the total indebtedness to the company to over £140,000.
Another partnership—four partners—made profits of something approachinfg £500,000 in a recent year. The profit was distributed in this way: one partner, got £12,000, but his family company got in the region of £140,000. Another partner got £30,000, and his company got something less than £30,000; another partner got £20,000 and his family company got nearly £40,000; the other partner got £7,000 and his family company got nearly £40,000.
According to the latest information available, the first family company paid directors' fees of £4,000, but paid no dividends, although it received this sum of £140,000. The second family company paid no directors' fees or dividends, but made loans of £14,000 to its directors. The third family company paid directors' fees of £4,000, but no dividends and made loans of £10,000 to its directors. The fourth family company paid directors' fees of £3,000, paid no dividends and made loans to its directors. The tax involved in this case, compared with what the position would be if the partners were chargeable on the income diverted to family companies, would be in the region of £60,000.
Another partnership made up its accounts to date in a recent year. The principal participators in the partnership profits were two people: one received £13,000 and the company gave £19,000 to his family company; the second one received similar sums, £13,000 and £19,000 to the family company, £64,000 in all. The after tax income of the first family company was £10,000, all of which was retained by the company, and the second family company's share of the profits after the payment of tax, also amounted to £10,000, none of which was distributed. This case concerns a company whose accounts disclose a profit of £3,000, and this company is providing services for a doctor. The company paid neither dividends nor directors' fees and had a balance of undistributed profits amounting to £11,000. At the balance sheet date, the company had advanced £15,000 to the doctor.
Another case concerned an unlimited company where a person had a service agreement with a large concern. He transferred this agreement to a company of which he is managing director and which he controls through his associated company. One of the conditions of the transfer was that the man in question would be employed by the company to which he transferred the service agreement, to manage the affairs of the large concern in question, with whom he had the service agreement, and which now pays management fees to the company rather than directly to the man in question. As a result of the transfer of the service agreement, and some other complicated associated operations, the company, which was given the benefit of the service agreement, holds £500,000 for the man in question on loan accounts secured by debentures. It is anticipated that the amounts will be paid off out of future profits of the company in question, and these repayments will not be chargeable to income tax in the hands of the otherwise potential taxpayer.
We are also aware of a company which provides management services for an individual who holds public office. This shows undistributed profits at the balance sheet date of £37,000. There are many cases of that kind and I am sure the illustrations I have given have shown what we are up against.
