Oireachtas Joint and Select Committees

Tuesday, 5 November 2019

Select Committee on Finance, Public Expenditure and Reform, and Taoiseach

Finance Bill 2019: Committee Stage

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein) | Oireachtas source

While I welcome the increase in the dividend withholding tax and the Minister is aware that I argued for the introduction of the tax in previous Finance Bills, it is very clear that many companies are not paying at the rate of 20%, as legislated for. I believe the Minister is on record as saying the average figure is about 15% on small holdings. We know that as a result of double taxation treaties and because of the ability of investors to reclaim dividend withholding tax, in some cases they are paying as little as zero. This relates to Irish real estate funds, IREFs. and also to real estate investment trusts, REITs. It is important to say that when REITs were introduced in Ireland, they were sold on a different basis than they are today. When budget 2013 was introduced - I was in the Dáil at the time - we were told: "The introduction of REITs may also assist NAMA in deleveraging its portfolio and allow it to bring more sustainable activity to both the commercial and residential property markets." It was suggested it would allow ordinary persons to invest in a portfolio - persons who would not usually be able to invest - and that their investment would be not safe but safer as a result of the putting in place of the REIT structure. In reality, we know that that is not what is happening. We know that there has been a huge property plunder taking place in the past few years. Three REITs were founded in 2013 and 2014 - the Hibernia, Green and IREF REITs. There is also the fledgling Yew Grove REIT that was established last year. The level of market capitalisation of the REIT sector between 2013 and 2015 rose from €874 million to €2.5 billion. As of three months ago, before the sale of the Green REIT, property portfolios were valued at €3.7 billion. Is that figure accounted for by the structure that allows the ordinary person to invest?

In reality, that is not what is happening. We see what is happening from the analysis done by the Central Bank, which is that the investors this year are not like Joe Public, as had been claimed before 2013. There was intense lobbying on the setting up of the REITs structure at that time, and serious players from property, investors and industry lobbied extensively from 2011 for their introduction. Representations were made to the Department of Finance, the Central Bank and the Irish Stock Exchange, and high-profile public meetings were held. Senior National Asset Management Agency, NAMA, officials publicly endorsed the introduction of REITs, and a number of lobbyists ended up working for some of the bodies, particularly NAMA where they managed portfolios that were eventually sold to newly founded REITs.

What we were told at that time is not what has happened. The majority of REIT shares are not held by ordinary Irish people but by investors outside Ireland, the two biggest being domiciled in Luxembourg and the Netherlands. This means that when distributions take place, as they have to, they take place where the dividend withholding tax will apply. Theoretically, they are supposed to pay at 20%, but in reality, people with small holdings pay 15% and, in many cases, because of double taxation treaties and other measures, they are able to pay zero. We need to tighten up on this, and while the Finance Bill tightens up on it to a certain extent, it does not go far enough. When I argued for a dividend withholding tax of 20% as an introduction, I said that figure would need to increase to 33%, which is what capital gains tax is at this time.

We have the same situation with IREFs. The total asset value of the Irish funds industry was €4.2 trillion in 2018 and IREFs benefit from an enjoyable tax treatment in the form of the gross roll-up regime, which means there is no taxation within the fund regardless of the assets and the accumulation of value within the fund. Taxation is only applied to distributions and we apply the dividend withholding tax of 20% because the vast majority of shareholders are non-resident. They can also reduce this 20% substantially. It is going in the right direction to change the rate to 25% but it should go a lot further and capital gains tax should be applied to these assets. My amendment proposing to change the rate from 25% to 33% has been ruled out of order, but the Minister needs to give serious consideration to it. There are also serious questions relating to REITs, though I welcome some of the moves we will deal with later. They were about to pull a fast one and I will address this in more detail in the context of what we put into the Finance Bill two years ago.

The tax nature of these structures is causing problems and we cannot allow these funds to be exempt from tax on rent, from capital gains tax inside the fund, and from income tax while we only apply a withholding tax that they can reduce. This has a huge effect as they have been buying up properties in what is an ongoing property plunder. In five or ten years we will look back on this and ask how the Government allowed it to happen. What some of these funds are doing is absolutely scandalous, as is the fact that we are benefiting from it through the tax code.

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