Stephen Donnelly (Wicklow, Social Democrats) | Oireachtas source

The Government has done great work on the section 110 process and there might be close alignment on the policy objective of the IREF section, but as it stands, the section exempts from tax almost every investor in commercial and other investment property in the country. In light of recent events, it is really dangerous. Brexit will probably hit our small and medium enterprise sector hard, and this will in turn hurt the Exchequer in terms of taxes. President-elect Trump's leading economic spokespersons have spoken repeatedly about bringing jobs back from Ireland. We have been reliant in recent years on unexpected corporation tax receipts, and although I hope they will continue to grow, there is no question that they are under threat.

One of the safe taxable asset bases in the country is property because it is here. Other countries apply capital gains and withholding taxes to property profits and so forth. This amendment goes to great and worthy lengths to bring in very serious anti-avoidance provisions to stop people trying to get around the withholding tax. It is clear from the amendment that once property is held for five years, the party is exempt from paying capital gains taxes. Right now, if somebody buys a hotel for €10 million, holds it for six years and sells it for €20 million, the party pays capital gains tax on that. In the new world, it will not. Right now, some foreign pension funds, including some from the US, pay withholding taxes in Ireland, just as Irish pension funds pay withholding taxes in the US. Under this amendment, they will not pay those taxes any more, if I understand it correctly.

Irish and foreign life assurance funds pay taxes in Ireland. It is really complicated and when I tried to look into it, I found the tax calculations for life assurance funds mind-bogglingly complex. Nevertheless, they pay taxes on their property assets but in this new world they will not pay such taxes. They are explicitly excluded from both capital gains and withholding taxes. Real estate investment trusts pay taxes on their property assets but they will not continue to do so. Irish collective asset management vehicles and qualifying investor funds pay taxes on property assets, but as far as I can see, they will not continue to do so.

This amendment, in fairness, seems to make it more difficult for reasonably small-scale Irish property investors to avoid paying tax. For example, one of the tax avoidance mechanisms explained to me occurred when a party bought a hotel or several hotels and put them in a qualifying investment fund, allowing the party to roll up profits tax free for seven years. The party is meant to pay taxes on exit from the qualifying investor fund in seven years but, lo and behold, when the tax is due, the party happens to be domiciled for tax purposes in Portugal, Malta, the Caymans or Monaco, so it pays no tax. This amendment stops that tax avoidance. It means we are okay with the party rolling up the profits tax free for seven years, but when it hits the exit window, it will pay taxes. The party will not pay capital gains tax, although it should and I have no idea why it would not have to do so. Nevertheless, the 20% IREF withholding tax will be applied. That should be acknowledged.

If an individual citizen buys an apartment for €100,000 and sells it for €200,000, none of this applies and the citizen will pay the full rate of capital gains tax. With rent coming in from the apartment, he or she will pay universal social charge, pay related social insurance and income tax. It will essentially be 50% tax on the rental income.

If one is a medium-sized investor and can afford to pay lawyers to have it included in a special purpose vehicle, one will pay no capital gains tax, albeit one will pay at a rate of 20% on exiting. We have already established that there is one tax law for individuals and another for those who are wealthy. If someone wants to buy a small apartment using part of his or her pension fund, he or she will be hammered for tax. If, however, one is wealthy enough to be able to afford to pay decent lawyers, they will include it in an investment fund and one will not pay any capital gains tax on it, unlike the individual citizen, but one will pay withholding tax at a rate of 2j0%, which I support. I have no idea, however, why we are exempting them from capital gains tax.

There is a third set which comprises institutional investors which include domestic or foreign pension funds, domestic or foreign life assurance funds, credit unions or, critically, investment undertakings, which category includes REITS, ICAVs and QIAIFs. Not only will they not pay capital gains tax, they will not pay withholding tax either. That is why I am very worried about this measure. I do not think it necessarily intends to exempt property investments from the tax base, but ultimately it will have that effect. In so doing the amendment violates the Minister for Finance's stated objective, which is that gains arising from activity in Ireland should be taxed in Ireland. If someone buys an apartment block or a hotel and makes a profit, he or she should pay tax on it. For historical reasons, we have exempted pension funds; so be it and let it continue. As I read this, however, and as it is being interpreted by some property investors and their lawyers, it will make it a great deal easier for the large players and institutional investors to pay no tax. The CGT exemption should not be provided for. The average citizen does not receive it. Anyone who buys an apartment and sells it at a gain pays capital gains tax. The withholding tax exemptions should not be applied either, except in the case of pension funds. In all other cases, withholding tax should be paid.