Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

This section gives legislative effect to the changes announced in budget 2014 of my intention to increase the rate of exit tax applicable to income in gains from investment and life assurance policies and investment funds. With effect from 1 January 2014, a new flat rate of 41% will apply to income and gains from investment in domestic and foreign life assurance policies and investment funds that comes in the gross roll-up taxation regime. This is in line with the proposed increase to the DIRT rate in this Bill. Under the gross roll-up taxation regime, investments may accumulate without the imposition of tax. However, an exit tax applies when a chargeable event occurs, such as the receipt of payment from, or the disposal of an investment in, the life policy or fund or the ending of each eight-year period following the acquisition of the policy or the units in the fund. Previously, the rates of tax on these investments varied depending on the frequency of payments to the investor and, in the case of foreign investments, on whether the income or gains were correctly included in the investor's tax returns to Revenue under the self-assessment taxation regime. The legislation governing the gross-up taxation regime also contains anti-avoidance measures. Where a payment from an investment held in a personal portfolio life policy or a personal portfolio investment undertaking is correctly included in a tax return to revenue, the tax rate that applies up to 31 December 2013 is the standard rate of tax, currently 20%, plus an additional 36 percentage points. The rate is being increased to a 60% rate with effect from 1 January 2014. Second, where payment from investments held in a personal portfolio life policy or a personal portfolio investment undertaking is not correctly included in the investor's tax return, the rate that applies up to the 31 December 2013 is the investor's marginal rate of tax plus an additional 33 percentage points. That is being increased to 80% with effect from 1 January 2014. These exit tax rate changes are estimated to yield the Exchequer €12 million in 2014 and €16 million in a full year. The combined projected additional yield from the increase, and the increase in DIRT, is expected to be €105 million in 2014 and €140 million in a full year. The policy intent is to ensure there is no distortion in the savings market as a greater imposition is placed on savings, through the increase in DIRT to 41%, and that an analogous impositions should be made on insurance policies for investment purposes.

I understand that at last week's briefing with officials, Deputy Donnelly asked whether any elasticity had been built into the yield estimates for exit taxes. The figures used in the budget material for projected yield from the increase was €12 million in 2014 and €16 million in a full year. From the DIRT increase, we have projected €93 million in 2014 and €124 million in a full year. The short answer is that the projections do not take into account any behavioural response. It would be difficult to devise an econometric tool to measure the potential behavioural impact of a tax increase on investment products, particularly in light of the alternative investments available. Tax should not be the main reason for making an investment. The security or value of the investment is more important in such decisions. Life insurance and investment funds are longer term investments so the yield in 2014 is unlikely to be directly affected by an increase in the rate this year. A person who invests in a life insurance fund in 2014 would not be doing so to obtain a yield from the fund in the current year. Even if the rate dissuaded the individual from investing in 2014, it will not affect the 2014 exit tax yield, which will be based on the decisions made by individuals investing several years before and on the performance of the investments.

I take the general point that in complex amendments it is difficult for Deputies to fully assess them or to know whether they are in favour of them. We will examine that to see whether we can put more information in circulation prior to debates on Committee Stage in future years. It is a valid point as part of a general improvement in sharing information.