Mr. Rónán Hession:

The logic behind the tax treatment of REITs and other investment vehicles is that one wants to put the investor in the same position as someone who, say, just bought a house and rented it out. With funds taxation, we are saying that there will be a double layer of tax law without some adjustment to the tax law. This is because the fund will pay tax and then the individual will pay income tax on his or her drawdown. In general, funds taxation in OECD countries is about stripping out what would otherwise be a double layer of taxation. REITs are generally new builds and they have to adopt a particular model. For example, 85% of their profit has to be paid out. It cannot retain the profit in the fund and avoid taxation. It has to be pumped out of the fund. The Deputy is right that there is a 20% withholding tax and the investor will then pay income tax in the same way as the Deputy or I would pay tax on rental income from a house we had bought.

A couple of years ago a problem was brought to our attention by our colleagues in Revenue. The use of funds in the area of property was creating a risk to the Irish tax base. In the Irish tax system and international tax system, one always retains the taxing right to property in one's jurisdiction. One should not let that leak out of one's base. There was a concern that structures were available to some of the property developments and those buying distressed loans - the Deputy referred to those who were in the so-called section 110 companies - where Ireland was at risk that the tax rights to property was leaking out of our base, with consequent unfairness to other types of investors. There was a general sense that the tax system was not designed to allow that type of leakage.

Therefore, a number of changes were made two Finance Bills ago to ensure, first, that section 110 companies could not avoid tax. They were not allowed to sweep the profits out. They are subject to a 25% tax rate. They pay the investor rate rather than the lower 12.5% rate. When it came to property, that got taxed at 25%. In terms of other types of funds, where they had investors overseas, we took the 20% withholding tax that was on REITs and applied it to those types of funds. They are Irish real estate funds, IREFs. These funds have a reasonable component, that is, a 25% component, of Irish property.

The issue the Deputy raised is very germane to the tax policy debate in the last number of Finance Bills. It is an area in which changes have been made. We will start to see what difference it has made to the figures this year as the tax returns come in. Given what we understand from their public information, we expect that some of them will move out of funds structures and perhaps incorporate as regular companies, which is as it should be.