Pearse Doherty (Donegal, Sinn Fein) | Oireachtas source

I agree with Deputy Stephen S. Donnelly that we need time to discuss the legislation. One should be able to move in and out of the debate and the Chairman has always facilitated us. Having said that, the Deputy has got it wrong in terms of how capital gains tax is applied to funds. If he is correct, I have misunderstood the way in which the provision operates. I believe there is no CGT liability within the fund. That does not mean there should not be a CGT liability, an issue I want to discuss.

The only tax payable will be the dividend withholding tax. I welcome the introduction of a 20% withholding tax. I recommended the rate to the Government. The rate is at the low end, but it is better than having no tax and is a starting point.

The big problem concerns the gains made following the uplift in property prices in the past few years. There has been a sizeable uplift and gains have accrued within funds, but there has been no dividend withholding tax. That is unacceptable. This has created a serious problem in the commercial property market in Dublin and elsewhere. International agencies such as Moody's and the IMF have warned us about what has been happening in the commercial property market. The Government's tax strategy papers mention the overheated price of commercial property. It is unbelievable. We know, as members of the banking inquiry committee, as do people who read the report, that the problems in the banking system stemmed from the commercial property market.

However, there was a price increase last year in central Dublin of 22.4%. These funds own property and a third of commercial property in Dublin has been flipped and bought up in the past three years. Moody's refer to the fact that, in 2006, 2% of commercial property was being bought by external money. At present, it is over 65%. It is all external money and it is coming through these fund structures, with no taxation.

I have a number of problems with this section but I will deal with the CGT exemption for a start. I acknowledge that the Minister for Finance is providing that, for the first time, there will be CGT if one sells within five years. However, and I agree with Deputy Donnelly on this, if one is not in a fund and one buys a hotel, the transaction is subject to CGT. If, however, a fund buys the hotel, it is not subject to CGT. That is the case for an Irish investor. The issue is that CGT should be applied here. It is not just commercial property. Residential property prices have increased by 42% from their lowest point in 2012. The increase outside the capital has been 32%. The increase in the commercial centre of Dublin was 22.4% in 2015. It makes no sense that no CGT applies. It is a policy decision by the Government and I do not support it. This is a good amendment providing for a 20% dividend withholding tax. Allowing no CGT to be applied, however, is unacceptable. Some of these companies and funds came in at the lower end of the market. They bought about five years ago when property prices were on the floor. All they need to do is hold on for another 12 months when all of the gains arising from the increase in asset value will be non-taxable. The dividend withholding tax does not apply to that part of the gains for the non-resident investor. That is completely inappropriate.

Another item in the amendment and in the original section I wish to discuss is the 25% ratio. There is no reason for setting a 25% ratio because it allows for huge tax leakage. I acknowledge that there would be issues involved if one were to dilute the fund to try to reach this threshold. The existing position would hold and there are anti-tax avoidance measures within the legislation. However, there is no reason to provide that income generated from property in this State should be non-taxable. That is what the Minister of State is saying. If we accept the principle - it was accepted earlier when we were dealing with section 110 companies - that Irish property and income and gains generated from that property are taxable here, then one must get rid of the 25% threshold. The primacy of Irish property rights is accepted across the world. This is what the Minister for Finance is trying to do but he is only doing it for funds that have more than 25% of their portfolios in property. We are dealing with funds that have billions. Take the example of a fund that has €1 billion in assets and €240 million of them are in commercial property in Dublin. This is a hypothetical position but it means that the fund, owned by international investors, does not pay a penny in tax in this State. That is ridiculous and it comes about because the €240 million only accounts for 24% of the fund's portfolio.

It has been suggested that there must a cut-off point and that it would be very difficult to identify within funds how much of the dividends are linked to Irish property and so forth. These funds are very sophisticated. The asset managers of these funds have every detail at their fingertips. A push of a button will give the information relating to Irish dividends if one is a fund manager for Irish property. It is a policy decision by the Government to introduce a 25% threshold, which means it is coming up short on the principle that income from property located in the State should be taxable. The Government is saying that it is only if 25% of the overall portfolio is made up of Irish property. That is wrong.

I have other questions but perhaps the Minister of State will deal with the ones I raised before I continue to other parts of the amendment.