Oireachtas Joint and Select Committees
Tuesday, 15 November 2016
Select Committee on Finance, Public Expenditure and Reform, and Taoiseach
Finance Bill 2016: Committee Stage (Resumed)
We are opposing section 15 of the Bill. It is restoring full interest deductibility for rented residential property over a five-year period at 5% a year, going from 75% to 80% and back up to 100%. It was a key demand made by the landlord lobby groups, certainly to the Committee on Housing and Homelessness and, presumably, also to the Government. The Government has agreed to it and obviously it will manage to get it through. The logic the Minister of State will put forward will be of boosting supply and stopping landlords from exiting the market. It is of one with a general complete lack of coherence in the Government's housing policy, which is also reflected in some of the stuff that is coming out in its rental plan of subsidising people's rent, which is surely going to push rent even higher.
Effectively, the impact of this will be to incentivise buy-to-lets at a time when there is still a huge hangover of buy-to-lets in arrears from before the crash, covering up the fact that Ulster Bank has sold close to 2,000 buy-to-lets in long-term arrears to Cerberus. There was a report which I asked the Minister, Deputy Noonan, about in the Dáil last week on AIB planning to sell off close to €2 billion worth of buy-to-lets. A 5% increase in relief will not make much difference to people in long-term arrears but will incentivise new landlords to take out new buy-to-lets, which will increase competition for a limited supply of housing and drive up prices.
I made the point in the Dáil that Dr. Lorcan Sirr was quite scathing in The Sunday Timesof the Government's programme and the incoherence of it. He wrote that the Government was pushing up house prices and helping to make them unaffordable for first-time buyers. He wrote that the fact the Government is incentivising this with more tax breaks, while simultaneously handing out first-time buyer rebates, shows how incoherent its policy is. I do not understand why we would incentivise buy-to-let landlords at this stage. I do not see how it is going to make any contribution to resolving the housing crisis. In fact, it will have a detrimental impact.
I move amendment No. 73:
In page 34, between lines 2 and 3, to insert the following:
"(3) The Minister shall, within three months of the passing of this Act, prepare and lay before the Oireachtas a report on the breaking of the link between the rate of DIRT and the rate of exit tax from life assurance policies, including the impact of this on life assurance savers.".
This amendment relates to the reduction in the DIRT tax, which I welcome. The issue I am raising by way of the amendment is the breaking of the link that has existed for well over a decade between the rate of DIRT tax and the rate of exit tax applicable to life assurance investments, for example. The yield from the exit tax on such investment projects has increased dramatically in recent years. At the heart of this amendment is that there will now be a discrimination between the different types of savings and investment products which has not existed heretofore. This comes at a time when, as the Minister of State will be aware, returns are close to zero across many of the savings, deposit and investment products and there is already a 1% stamp duty on life assurance investment products. I pre-empted the amendment being ruled out of order, had I proposed that the link be retained, by putting it in the context of a report as to the consequences of doing this for people who are saving through investment instruments. That is the key issue.
Deputy Michael McGrath is aware of the DIRT changes announced in the budget by the Minister, Deputy Noonan, and as such I will not go through them again now. The Deputy is also aware that in the past the rates payable on a series of other taxes, including exit tax, on life assurance policies have tended to move in line with DIRT. However, on this occasion the Minister took the decision that those other rates would not be reduced, and for the following reasons. The cost of reducing the rates of the other taxes, where the rates payable have tended to move in line with the rate of DIRT, by two percentage points has been tentatively estimated by the Revenue Commissioners to be €14 million per annum or approximately €56 million per annum by 2020, the four-year period over which DIRT is to be reduced. It was, therefore, too costly to the Exchequer to reduce the rates applying to the other taxes in the same manner as is being done in terms of DIRT.
When the rate of DIRT was originally increased, it was aimed at revenue raising and at encouraging consumer spending to boost economic activity. The Minister is conscious of the impact of DIRT rates on the smaller saver who invests in retail savings and where there has been a long period of low interest rates and consequently a low rate of return on such products. As consumer expenditure has now increased significantly it is now possible to reduce the rate of DIRT to improve the return to the smaller saver. A report, prepared within three months of the passing of this Bill, is unlikely to reveal anything we do not already know. The issue is not a lack of desire to reduce the rates of exit tax on the other taxes that have previously been linked to the rate of DIRT, but is a result of the cost of moving all the rates in tandem due to the not inconsiderable cost of doing so.
I can assure the committee, and particularly Deputy McGrath, that in common with all taxes, exit tax is subject to ongoing review and in this process the rate of tax, as well as all reliefs and exemptions, are carefully considered. For these reasons, I do not propose to accept this amendment. I will undertake to speak to the Minister about the tax strategy group being asked to examine this area for next year, which may meet the desired effect of the amendment.
A 2% differential is one thing, but is the policy of Government now to reduce DIRT to 33% over a number of years and to leave the exit tax on other savings and investment products, such as life assurance investment products, at 41% indefinitely? Is it now the case that this link has been done away with or is it that a pragmatic decision has been made for this year on the basis of the cost of extending it across the board?
The link no longer exists. A decision has been made that breaks that link. The policy decision in so far as DIRT is concerned is clear. The two remaining taxes that were traditionally linked will need to be considered next year in the context of preparation of the tax strategy group papers. From a pragmatic point of view we cannot afford to retain the linkage because the cost to the Exchequer would be too high. The link is broken in respect of this year but it would be important that the tax strategy group would review this decision in the context of the preparation of next year's papers. I do foresee any reason the Minister would not agree to that.
The cost in 2017 of the 2% DIRT reduction is €9 million. The Minister of State indicated that the cost in a full year will be €14 million. What would have been the extra cost of extending that reduction to the products to which I am referring?
We are opposed to the reduction in DIRT because it is clearly regressive. Those who will benefit are those who have money, which I do not begrudge them. This reduction will benefit sections of society that have larger amounts of money already saved. At a time of low-paid workers, underfunded public services, austerity taxes and so on I do not think it is appropriate to provide for a tax break that will benefit the better-off sections of society.
Amendments Nos. 76, 79 to 85, inclusive, and 87 to 95, inclusive, and 97 and 98 are related and may be taken together by agreement. Amendment No. 97 is a physical alternative to amendment No. 96.
I move amendment No. 76:
In page 34, to delete lines 17 to 21 and substitute the following:
“not later than 8 weeks from—
(I) 1 January 2017 where the day referred to in paragraph (e) predates 1 January 2017 and the company has not yet made the notification in writing to the authorised officer in the form prescribed by the Revenue Commissioners as required to be made by the specified return date (within the meaning of section 959A) for the first accounting period in relation to which it is such a company, or
(II) the day referred to in paragraph (e),
and where information required is not available at the time the written notification is provided to the authorised officer, that information should be provided without undue delay upon becoming available,”,”.
I propose to take amendments Nos. 76, 79 to 85, inclusive, 87 to 95, inclusive, and 97 and 98 together. These amendments are mainly technical in nature, their purpose being to make minor drafting changes and to ensure that the section 110 legislation, which deals with the taxation of special purpose structured finance companies, operates as intended. Proposals for an amendment to section 110 were initially published by the Department on 6 September 2016 to facilitate consultation on this complex and important issue.
I would like first like to address a query that was asked of my officials at the recent committee technical briefing in respect of the numbers of section 110 companies. I am informed by the Revenue Commissioners that based on 2014 account information, which is the most recent data available, 1,391 section 110 companies filed accounts for that year. The amendments which I am now proposing reflect the complexity of this topic. They provide for minor drafting changes, along with some technical changes, regarding the scope of the amendment. The main objective of the amendments is to protect the position of Irish property in the tax base. The section prevents businesses with loans which are secured over, or derive their value from, an interest in Irish land from using the provisions of section 110 to avoid payment of Irish tax on profits made on Irish property transactions. I should mention that amendments are being made simultaneously to Part 27 of the Principal Act, to insert a new regime for the taxation of Irish real estate funds, IREFs. This will eliminate the potential for any arbitrage between the two areas. While the two regimes are separate, the Revenue Commissioners have advised me that there are a number of structures which involve both a section 110 company and an Irish fund vehicle and, therefore, it is important that the interaction between the two regimes is addressed.
I will now outline the changes that will be made as a result of each amendment. Amendment No. 76 clarifies the timeframe for making a notification to be a qualifying company under section 110. The amendment clarifies that a company whose qualifying assets reached the minimum €10 million market value before 1 January 2017, and is or intends to be a qualifying company, must submit its notification to Revenue not later than eight weeks from 1 January 2017. In all other circumstances, from 1 January 2017 a company must notify Revenue of its intent to be a section 110 company within eight weeks of it reaching the minimum €10 million market value for its qualifying assets. Where the information is not available at the time of making this notification, that information should be provided to Revenue as soon as it becomes available.
Amendment No. 79 is a technical amendment to include a reference to the Global Exchange Market of the State. The Global Exchange Market is an exchange regulated market and multilateral trading facility. The Irish Stock Exchange is the competent authority for the review, approval, listing and admission to trading and oversees submissions for listing on the Global Exchange Market.
Amendments Nos. 80 to 82, inclusive, are drafting amendments to provide clarity regarding the criteria for securitisation transactions, which are carried out in conformity with legally binding documents. Amendment No. 83 relates to the definition of "loan origination business", which provides that qualifying companies which lend directly to companies, whether SMEs or larger corporates, are not impacted by this amendment. This is to ensure that qualifying companies that loan to companies which have a specified security are not inadvertently excluded. The amendment clarifies that the definition of "loan origination business" does not include the making of an advance or loan regarding a specified security to a borrower who has a specified property business as defined.
Amendments Nos. 84 and 85relate to the definition of "specified mortgage", which isdefined as a loan secured on Irish land or a return agreement which derives its value from Irish land. The amendmentsexpand the meaning of "specified mortgage" to include the portion of the specified security relating to the specified property business that is to be treated as a separate business of the qualifying section 110 company.This is an anti-avoidance provision. Also included in the definition are units in an Irish real estate fund, which is required to ensure that neither this amendment nor the IREF amendment can be circumvented in the structures which involve both.
Amendments Nos. 87 and 88 expand the meaning of "specified property business", clarifying that the definition does not include activities which are preparatory to a CLO transaction, a CMBS-RMBS transaction or a loan origination business.
Amendments Nos. 89 to 93, inclusive, make minor drafting changes which relate to the conditions whereby a qualifying company engaged in a specified property business can avail of the relief regarding the use of the profit participating note. The categories of recipients who can receive the coupon with deductibility are set out in the original section. They are an individual resident in the State who is within the charge to income tax or a company within the charge to corporation tax; an Irish or EEA pension fund; or an EEA citizen who will pay tax on receipt of the interest, without any deduction for profit participating interest, provided that the payment of the coupon of the EEA citizen is not for tax avoidance purposes.
Amendment No. 94 makes clear that financing instruments which are neither debt nor equity cannot be used to reduce the interest or distribution in relation to an EEA citizen. Amendment No. 95 expands the categories of recipients who can receive the coupon with deductibility to include an IREF and an investment undertaking which is not a personal portfolio IREF. This amendment, coupled with amendment No. 85, deals with the interaction between section 110 companies and Irish real estate funds to ensure that double non-taxation or double taxation is prevented.
Amendment No. 97 is a minor drafting amendment. Amendment No. 98 clarifies that withholding tax must be correctly applied and such tax is not refundable. I commend the amendments to the committee.
The context for the changes to the section came about when it came to light the vulture funds were essentially paying no taxes in the country. I took a look at the total assets managed by the vulture funds and the yields they were making on them. This is based on their own accounts and the profits they state they are making. By my calculations, were they allowed to continue to avoid paying all taxes, the State would lose in the region of €10 billion to €20 billion over the next ten years or more. The amount of money at stake here is off the scale.
I recognise that significant progress has been made by the Minister. The mark to market inclusion is very welcome, the 20% withholding tax application is very welcome, and the notification to Revenue, to which the Minister of State has alluded and is updating again, is also very welcome. The word I have from the industry, from advisers to the vulture funds, is they are still very confident they will be able to help their clients avoid all, or nearly all, taxes in the country. I want to go through various loopholes they have identified. These are not loopholes I believe are errors in the amendment proposed to the committee by the Minister of State, these are loopholes the lawyers and accountants advising the vulture funds have identified. They are quite bullish about these. They are advising their clients privately they will be able to use any number of these to continue to get around paying tax in the country.
Before we go into them, I would like clarity on the Government's policy position. I believe we are lined up, but just to be clear, my understanding of the policy position as articulated by the Minister, Deputy Noonan, is that profits generated from economic activity in Ireland would be fully taxed in Ireland as per normal companies and in this case, therefore, a company managing a loan book, which is what the vulture funds do, be they mortgages, commercial or unsecured debts, would pay full capital gains tax and full withholding tax. Before we get into the detail, just so there is no confusion, will the Minister of State confirm the Government's position is still that the profits generated by the vulture funds here will be fully taxed and they will not be allowed to continue to avoid paying taxes in the country?
The purpose of the amendments we are making, and I note further amendments will possibly be made on Report Stage because we want to ensure the language is tight enough to capture any leakage of tax out of the State, is to ensure where there are taxing rights and tax owed to the State where the transaction is based on an asset that derives its value from property that those taxes be collected. The amendments speak to ways in which to capture these taxes where the securitisation is taken in section 110 and derives its value from property backed assets. This is in the intention here. The Deputy has spoken about potential loopholes in the amendments as drafted, but the intention is there would be none, and there would not be any leakage out of the State in terms of money owed to the Exchequer post this section being agreed and enacted.
I thank the Minister of State. The Minister, Deputy Noonan, has stated previously, and I want to check this for the purposes of this conversation, the vulture funds use section 110 in a way in which it was never intended. Is this still the Government's position?
I do not think it was anticipated that section 110 would be used this way. It was known by Revenue and the Department that section 110 could be used to securitise such assets, but not that it would be used in this way and that there would be such a loss of tax to the State.
I thank the Minister of State. If the Minister of State does not mind and bears with me, I will run through the loopholes. The first loophole the advisers are telling the vulture funds they will be able to use to continue to avoid paying taxes in spite of, in fairness to the Government, very good efforts to try to shut down this behaviour, is they are bullish their existing loan arrangements will be allowed to continue. As context, the way vulture funds avoid paying any tax here is they set up loans from abroad to themselves via various mechanisms. These are high interest loans known as profit participating notes, PPNs. Vulture funds here collect an awful lot of money through rent, capital repayments and interest payments. They accumulate significant profits and these PPNs, which are loans to themselves from abroad, are adjusted to a variable height whereby when the interest on them is paid no profit is left to be taxed in the country. The lawyers and accountants are telling their clients the Government will try to change this, which is what we are trying to do here, but that existing arrangements are rock solid and the Government will not be able to change them. Will the Minister of State confirm the proposed changes to the interest rates the vulture funds will be allowed to pay will definitely apply to existing loan arrangements for the vulture funds?
I thank the Minister of State. The next loophole regards the interest rate. The legislation proposes that rather than allowing these variable interest loans which suck out all of the profit, loans now have to be made to the vulture funds at a reasonable commercial return. What the accountants are advising their clients is there is no cause for concern as they will be able to get them rock solid reports which show that, for example, 20% is reasonable commercial rate. What tends to happen is the vulture funds borrow approximately 50% to 60% from a commercial bank, we have seen this in their own accounts, and they tend to pay approximately 3.5% interest on this. This is the senior debtor. The bit between the 60% and the 100% which is left is what they lend to themselves at these so-called mezzanine rates. To date, based on their own accounts, an interest rate of approximately 18% will wipe out all of the profits.
The vulture funds will go to one of the big accounting firms, who will give them big book and tell them this is how it was done in the UK and here, that Brexit is very scary, and that they do not know what will happen here because there is a lot of volatility in the market, and therefore it is reasonable the company in Luxembourg, the Cayman Islands or wherever, because it is not a senior debtor like the commercial banks, would be paid an 18% rate. I have two fears. These are this argument will succeed, in which case it is business as usual for the vulture funds, or that Revenue will negotiate a halfway house, in which case a vulture fund will come in with a report stating a mezzanine rate of 25% is absolutely reasonable, Revenue will start from a position that, for example, 5% is pretty reasonable, and they will negotiate and reach 12%, 13% or 14%.
If they do that they will still succeed through this loophole in continuing two-thirds of the tax avoidance. We will not see the 2017 accounts until 2018 or 2019. How do we ensure that when the committee meets in 2018 or 2019 it will not turn out they managed to negotiate a mezzanine rate of 12% or 13% and through that still managed to get two-thirds of the tax avoidance in place?
This is an interpretation of the language. Amendment 96, which is proposed by Deputy Donnelly, has much the same effect as the text which is already included within section 21 of the Bill but with one particular aspect it is slightly easier to meet the test than that which is already included.
The test in section 21 is that the interest which may be deductible is no more than the reasonable commercial return for the use of the principal. This is the same as the Deputy’s proposal to limit the interest to the return a regulated commercial bank would earn. However, by ensuring that the rate of return is tied to a quantitative test, that is the amount a bank would receive, it precludes a qualitative analysis of the interest payable being made and any consideration of the risk associated with the investment. This could mean that in certain situations companies could be able to claim a higher rate than was appropriate.
Both texts will involve an analysis of the commercial lending taking place, if any, at the time the loans were advanced in order to determine how much interest is deductible. Both texts provide that no deduction is available for any interest which is in any way dependent upon the results of the company.
The concerns raised by the Deputy are covered by the Minister, Deputy Noonan’s, amendment and it is therefore not necessary to amend the text and the recommendation is not to accept the amendment.
I appreciate that on amendment No. 96 but the substantive part of the amendment is “would represent no more than a reasonable commercial return to a regulated commercial bank,” because then we are into the 3% to 4%. I do take the Minister of State’s point about breaking the link to profits. The profit participating notes are structured and it explicitly states in them that whatever amount of profit resides in the company, the interest rate goes up to suck it all out. It is an explicit tax avoidance mechanism used in absolutely legitimate ways outside the vulture funds. I accept that it breaks the explicit link to saying the interest rate goes up to cover whatever profits there are inside the section 110. How do we avoid a situation where reasonable commercial return is successfully argued by the vulture funds as 12% or 13% versus what they pay on the money they actually borrow which in their own accounts is usually 3% to 4%?
That will fall to the Revenue Commissioners in so far as they are satisfied that this is consistent with the other provisions in the Taxes Consolidation Act 1997 and would afford them the ample scope they would need to challenge a company trying to do that or trying to circumvent what we are trying to do with the legislation in so far as section 110 is concerned, if they were trying to pay themselves artificially high interest payments and avoid tax. The Revenue Commissioners will not do deals. This has been identified as a tax leakage which we want to close down. That is the purpose of the amendment. In so far as the language is concerned, Revenue is satisfied that will allow it to do that, to make that challenge where necessary to make sure the appropriate tax is paid.
The fear is that Revenue can tell smaller companies that while it knows they would like 15% applied to this it is going to be 5% and if they have a problem with that they can spend the next ten years litigating. The vulture funds do not have that problem. They are not scared of the Revenue Commissioners. They will walk in with a Lever Arch folder of 1,000 pages explaining very clearly and reasonably why a 14% mezzanine rate is absolutely above board. Given the scale of these funds, globally, it is not a deterrent for Revenue to say it has to go court. That is a deterrent for the small investor who might use section 110 but absolutely not for the vulture funds.
We as legislators then have no oversight. We cannot see in. There are only approximately eight vulture funds. They have lots of little companies such as Maris Capital 1, 2, 3, 4 but there are only approximately eight global vulture funds here. The Revenue Commissioners will have to do individual deals with them, for example, Oaktree, 14%; Cerberus, 7%; Lone Star, 16.5% or whatever. Two problems arise: one, we have no way of giving a view as legislators as to whether we believe 10%, 12%, 14% or 16% is reasonable; two, because they are individual deals with individual companies we will never know what deals have been struck. The lawyers and accountants are telling the vulture funds that even if they cannot use the existing arrangements they will be able to justify ongoing high rates that are absolutely reasonable commercial returns.
Revenue will not be giving advance opinions in this area and it will not be doing deals with individual companies. If the matter goes to court the court will set the rate. If Revenue had a fear that the language was not clear enough for it to impose that rate it would look for stronger language but it is satisfied that the language as drafted will not allow companies to avoid this tax.
My understanding is the Revenue Commissioners will do individual deals with companies. Each company will present its own case for a reasonable commercial return because each company has a different risk profile, different asset base, circumstances, for example, the loan might be coming from a different entity. Is the Minister of State saying that Revenue will determine for section 110 companies that a reasonable commercial rate is 5% and that will apply to everybody?
That is not the same thing. Consistent treatment is not the same as the same answer. Revenue of course will say it is going to apply the same way of thinking to each company but each is in a different situation, one has a low risk asset base and therefore a low interest rate is reasonable, another has a high risk asset base and so a higher interest rate is reasonable. My understanding is that each company will get its own interest rate from Revenue and we will never see those interest rates.
Revenue will not be doing deals upfront with companies. To say a deal might be done is to imply that there is not a consistent application of an assessment of what tax should be paid. It will consider what would be a reasonable commercial return based on the investment made and make an assessment based on that. It will have to take into account the different investments that have been made. Revenue is not worried that this gives scope for the avoidance of tax that should be owed. I am minded to take its advice on this. We have been examining it and I have read the Deputy’s questions and his proposed amendment and they have been discussed but this is seen to capture what the section intends to capture in terms of making sure artificially high interest payments are not being made under the section.
The language is important. The Minister of State says Revenue will not do deals with individual companies. Revenue will do deals with individual companies. Revenue will make a ruling for each company on the interest rate it pays and that ruling will be kept secret. I do not think it will do deals as in anything inappropriate. I absolutely accept that Revenue will apply the legislation equally and fairly but the application will give each company a different interest rate and we will never know what those interest rates are.
I do not know what the solution is. I suggested that it is linked to a regulated commercial bank. If that was given to Revenue it could say the answer is 3.5% to 4%.
I ask that at least some form of surveillance be considered before Report Stage. It is my understanding that Revenue will do an individual deal with each company. I do not mean they are doing anything wrong in that regard, I define a deal as the agreement of a different interest rate for each company. In such circumstances no-one will ever get to see those interest rates. On the basis that this is mass tax avoidance in a way that was never intended or anticipated, and on the basis that there will be secret deals done by Revenue in every case - if they continue to use internal loans - there should be some mechanism where legislators, the media and the public can see the interest rates that have been agreed with each of these companies.
In so far as language such as "deal" is being used, this implies that special treatment is being given or secret arrangements are being made, and that is absolutely not the intention of this section. This has been identified and brought to light, publicly and correctly, and we are now moving to try and do something about it. It may just be a difficulty of language because I do not believe there is a difficulty of intent with regard to what the section aims to achieve. Regulated banks themselves can do mezzanine deals. An interpretation will always be required on the part of Revenue on what would be an appropriate rate. Revenue is satisfied that the language provided will allow it to do this. Given that there are so few companies working in this area the Deputy's suggestion of oversight to see what is being done would pose a risk of breaching tax payer confidentiality. This aspect can of course be looked at between now and Report Stage to see whether that could be achieved but we must be sensitive to the fact that there are so few players operating in this space.
I agree with the Minister of State, and I believe it is a fine balance, but this is an exceptional situation where we have a very small number of companies paying zero tax such as €250 on profits of €40 million or €50 million. Let us just round that tax down to zero. This is off the backs of businesses and families who are paying back their loans. The reason the companies are making such big profits is because of the collapse. I understand that there is a balance to be struck with regard to individual agreements with Revenue but the language used is secret arrangement, there will be no secret arrangement. If, however, Revenue agrees an interest rate with an individual company and no-one else is allowed to see what that interest rate is, then surely that is the definition of a secret arrangement? I believe the situation offers very considerable latitude for quite high interest rate arrangements but the Government is unwilling to tighten it up. Essentially the Minister of State has said that Revenue is satisfied and has what it needs and therefore we should let them at it. If that is the position, then so be it, but let us at least know what it is we have let them at. It would not surprise me, and this is no criticism of Revenue, one sees this in Ireland and abroad, one regularly sees mezzanine rates of 20% or 30%. If a company walks in to Revenue and offers 200 pages for a fine of 30%, and if Revenue says it will bring them right down to 10%, then 50% of this type of tax avoidance will continue. That is my concern. There must be some way for us, as legislators, to see what actually happened.
Does the Deputy not believe that his amendment gives the similar type of latitude around the potential interpretation that might be made by the company that is trying to apply a higher rate to avoid having to pay any tax on the-----
If a regulated commercial bank was willing to give a mezzanine rate of 8%, for example, they might make two loans; one is senior debt which the bank would get back before anybody else is repaid and that could be loaned at 4% and the second loan could be the non-secured loan, which is a risker loan so the bank might lend that at a rate of 8%. I would deem interest deductibility against those two loans as absolutely legitimate as normal business practice. If, however, it is not anchored to regulated commercial banks then we are into the world of international corporate finance law where, for example, Deutsche Bank might give a rate of 8%. However, the fund managers do not want to use Deutsche Bank, it wants to use the Cayman funds, and they say, for example, "Actually it turns out that they lend at 25%, here are the last five loans they have given, and by the way we own the Cayman fund and we are the ones making the loans", and so on. If the rate is not anchored to regulated commercial banking - which allows absolute legitimate tax deductibility - then we are into the world of secret negotiations, which we as legislators would never get to see.
A regulated commercial bank could issue a higher rate of interest if it sees it as a riskier venture, with a higher rate of return. It still requires an interpretation by Revenue as to what would be the best applicable rate to make. we do not want the kind of attitude that the Deputy fears. It is not the intention of the section. In this instance Revenue would be using the banks as their comparator as that would be the thing to do. Revenue is not going to allow the kind of comparator that the Deputy has outlined.
The problem is that we do not know. We do not know what revenue is going to do. As legislators, we would be giving them the phrase "reasonable commercial return". I argue that if the Government's position is to just let Revenue at this, then I am happy to accept that. There must, however, be some kind of feedback mechanism to the legislature to they arrived at a range of, say, 10% to 20%, or 4% to 8%.
The phrase itself comes from the tax Acts and is used consistently within the tax Acts. That is why that particular phrase is being used. Revenue is independent of Government and we have received advice that this would allow Revenue to work the Act as it is intended. The establishment of a reporting mechanism is being thought through, but there is a risk in that there are such a small number of entities doing this that one may not be able to report at a meaningful level without impinging upon a person's right to privacy in his or her tax affairs.
Absolutely. Based on what they have been doing, I am not terribly concerned about the tax privacy rights of vulture funds in Ireland but I do take the Minister of State's point. I will suggest one other fix for this. I cannot find anywhere in the proposed amendment that explicitly breaks any link between the vulture fund and the lender of the extra money. At the moment they lend money to themselves. The idea is that the loan is supposed to be an arm's length loan. In reality these companies have corporate structures all over the world in that, say, one can set up a fund in the Cayman Islands, loan to a company in Luxembourg which then lends to another company in Luxembourg, which buys an investment vehicle in Ireland which buys the loans and so on. Nobody sees the link between the loan and the vulture fund. As part of an anti-avoidance measure perhaps the Minister of State would take into consideration that there can be no link, domestically or internationally, between the lender and the vulture fund. Right now they are lending money to themselves and this is what we are trying to break.
The third point that accounting firms and lawyers are very excited about is the exemption in the amendments - as the Minister of State has already referenced - covering the residential backed mortgage securities, commercial backed mortgage securities and collateralised loan obligations. This means that if one owns a bunch of debt such as those loans owned by the vulture funds, for example 10,000 mortgages or commercial loans, one packages the up into a security which then can be sold as a bond. We have just had the conversation about reasonable commercial returns and arm's length loans being the way the Government is proposing to shut down the tax avoidance. I think that is correct and the right way to go, but there is still quite a bit of latitude there. The amendment goes on to say that this new provision will not apply to securities. The vulture funds are now being advised that if they take their loans and turn them into securities - it takes about two weeks and €50,000 in fees to turn a loan book into a listed security and the fees make some people very happy - the amendment exempts the securities from the new provisions.
The advice the vulture funds are receiving is that they use these security products all over the world and that they are familiar with them, and their approach is "Let's turn all our loans into securities". The legislation states that they are now exempt and can continue to avoid tax. My proposal is that the exemption be removed. I cannot find a reason to include it. It seems to be a serious loophole.
The residential mortgage-backed securities and the commercial mortgage-backed securities, which the Deputy outlined, are defined in the amendments so that they are the only securitisation transactions undertaken by banks within the EU's capital requirement regulation. The use of section 110 vehicles for these transactions is simply the facilitation of the repackaging of the risk. In most structures, the interest income and income expense will be matched such that no profit participating note is required. The bank's retained risk will usually be structured as profit participating notes to ensure that it retains the correct exposure to the portfolio of loans which were securitised. It is not anticipated by the officials or Revenue that there will be any loss to the Exchequer by allowing this type of transaction to continue in section 110 companies.
Therefore, what the vulture funds are being advised is to take their existing loan books of, say, 10,000 mortgages, package them up into a residential mortgage-backed securities and list the . That will take approximately two weeks. A company in Luxembourg will then buy such a security and, because it is a section 110 vehicle and exempt from the new provisions, the profits deriving from that mortgage book can be placed offshore without any taxes being applied.
The originator has to be a bank though. It still needs to be permissible for a bank to securitise its loan book in this way, regardless of whether it is made up of commercial or residential mortgages. Under the capital requirements regulation, the bank retains a portion of the risk. It is difficult, therefore, to see why a section 110 vehicle would try to step into this given that it would not satisfy what it is trying to do. It would not be able to do this. First, it is not a bank originating. Second, in terms of what has been attempted by the section 110 vehicle to date as far as the profit participating note is concerned and how it sweeps out, it would not be able to do it in this way because of the capital requirements regulation. For the banks, this is not about making super-profits, it is about managing risks. It needs to continue in place as part of their securitisation regime.
Banks, obviously, can securitise loans but they do not tend to do it through section 110. There is no reason an Irish bank securitising Irish mortgages should be availing of section 110. That would suggest it is involved in tax avoidance in which it should not be involved.
The reason behind section 110 was to provide for international securitisation. For example, Boeing builds planes. Airlines do not want to buy planes but they need to use them. There is an aggregator that allows planes to be bought by means of international investment money and then these plans can be rented out to airlines. Section 110 allows for this. The thinking in 1997 was that Boeing pays its taxes in America, the airline - let us say it is BA - pays its tax in the UK and the investors pay their taxes wherever they are based. Therefore, we have this box called section 110 that can take in the money, manage the asset and pay out dividends without the Irish Government applying withholding taxes. The rationale was that none of the value of those profits would be generated in Ireland and that, therefore, Ireland had no right to those profits.
If we take a loan book that is made up of Irish mortgages or Irish commercial loans, the logic I have outlined no longer applies and we are back to what the Minister for Finance stated was the position. He stated that profits generated by economic activity in Ireland must be taxed here. If, therefore, an Irish bank takes Irish mortgages - and the profits it is making are generated in Ireland - turns them into a security by means of a section 110 vehicle and it the latter on the Stock Exchange, it is doing so to avoid paying taxes. That is one issue. However, the issue the Minister of State and I are approaching from different perspectives is that of the vulture fund. The vulture fund has 10,000 mortgages. It can turn them into a security and list them on the Stock Exchange. It is then in a section 110 situation that is exempt from the provisions.
The official is shaking her head at what I am saying and, if what I am saying is not true, that is fine. However, I do not understand how it is not true. Perhaps the Minister of State can explain the position.
First, the use of section 110 in aviation financing is relatively recent. That is not one of the reasons section 110 was created. It was created to allow, for example, a bank to pool its debt and sell it as cash flow to a third party. There are benefits to doing that other than trying to avoid taxation. It would be done to diversify risk, to reinvest or to free up space in terms of capital requirements. There are many reasons an Irish bank would want to use a section 110 vehicle or to securitise in this way. It does not speak to tax avoidance.
None of the things to which the Minister of State referred cannot be done through a normal asset management company. There are alternatives to section 110. Any asset management company can do what the Minister of State just described. The reason to apply section 110 is to avoid tax. That is all section 110 does. It just makes the company exempt from paying taxes.
It is a way of ring-fencing the security that is the loan book from the entity. If the entity wants to securitise itself off into an special purpose vehicle, SPV, it can do so through a section 110 vehicle.
It can also be done without using section 110. Section 110 vehicles only exist in Ireland but banks all over the world do what the Minister of State is speaking about. The tax-free box that is a section 110 vehicle does not exist in the US, France or Germany. It exists here as a global securitisation play because there needed to be an aggregator that could bring profits into the country and out of the country that we did not touch because they did not come from here. In terms of any bank creating a security from its mortgages and taking it off-balance sheet and, therefore, diversifying its risks, banks do that all over the world, but they pay taxes on it.
I wonder if we could get a note from the Minister of State's officials to try to clarify the situation. The Minister of State is making a point. Deputy Donnelly is making a point. I think it would be helpful if we all got a note.
Section 110 is just another way of achieving that securitisation, which is done in other jurisdictions, as Deputy Donnelly stated, but it would be wrong to say that the only purpose of using section 110 is to avoid tax. It is tax-neutral. Being tax-neutral is not about tax avoidance, however, it is about choosing neutrality, whether it is an individual investor or-----
That is what it was intended for but it is now obviously not being used in that way. Let us narrow this down. My concern, and what the funds are being told, is that they will be able to take a package of 10,000 home mortgages, turn them into a security, list that security and, therefore, avoid the new provisions. Can the Minister of State explain why they will not be able to that?
The expectation is that it will not happen because it has not happened in terms of commercial or residential mortgage securitisations. That is why they are being stepped out of this. It is to allow it to remain in place so that the banks can continue that with legitimate securitisation. There does not seem to be a risk that foreign institutional investors would then try to step into that space to avoid paying this tax. If they did, however, there are other tax avoidance measures in place which would prevent that from happening. Let us ensure that we are on the same page-----
Brilliant. I thank the Minister of State. I also thank the Acting Chairman for his indulgence.
This segues in to the next section but, as the Minister of State indicated, they are linked, so this is not getting into the Irish real estate funds, IREF, section. I might just mention this to the Minister of State and we can pick it up in the IREF section.
The final tax avoidance loophole I am being told about is that the vulture fund transfers the assets from the section 110 company into a different vehicle, say, a qualifying investment fund, QIF. It predates that to earlier this year because there is a provision in the section that states that transfer of assets out of section 110 will not be allowed if it is deemed that it is for tax avoidance reasons, which is very welcome. The legal interpretation the vulture funds are getting is that if that is predated before 5 September, which they are entitled to do in any accounting year, it avoids that tax avoidance scheme. Now the vulture fund will have moved its assets out of the section 110 company into a qualified investment fund and under the next section, the qualified investment fund automatically will be designated as this new vehicle called an Irish real estate fund, and then two things will happen. First, they will be capital gains tax, CGT, exempt because they will hold the assets for five years. Second, these things called investment undertakings are exempt from the Irish real estate fund, IREF, withholding tax. When the vulture fund moves its mortgages it takes them out of the section 110 box, puts them into the qualified investment fund box and says that these mortgages are now in a QIF, the QIF is an IREF, the IREF is CGT exempt and because it is owned by this thing called an investment undertaking, it is also IREF withholding tax exempt and therefore it pays no taxes. I am happy to pick that up again in the next section. It is specific to the IREF so whatever the Minister of State wants to do-----
It is specific to the IREF but to come back on it quickly, if they were to do that and to backdate, clearly that would be fraud because they are trying to avoid paying the tax in a demonstrable way because it is linked to the date on which the section 110 amendment was first published, so they could not do that. However, even if they did step into a QIF for an Irish collective asset management vehicle, ICAV, in that way, they would not be exempt from the withholding tax that would be applied. Which type of funding did the Deputy say might be in-----
-----but the intention of this amendment is to make sure there will always be a withholding tax for the QIF, the ICAV or whatever it may be if it becomes an IREF. It depends on the point at which that tax potentially will be levied, but there would be a tax. The CGT point is a separate point we might come back to in the IREF section.
Specific to the vulture funds, the section 110 companies, let us come back to the withholding tax on the investment undertaking. We are probably agreed that any IREF that holds its asset for five years will not pay CGT.
Yes, but it is being introduced for those who dispose of it within five years. Currently, there is no CGT, so the policy decision being taken is to introduce CGT if the asset is disposed of within five years.
If a company buys a hotel for €20 million and it sells that hotel for €40 million two or ten years later, it does pay CGT on the €20 million capital gain. There is capital gain on property right now. If the Minister or I bought an apartment for €100,000 and sold it for €200,000, we would pay capital gains tax on the gain.
We will come back to that when we come to section 22 but the Deputy's concern about section 110 companies stepping into something else to try to avoid tax, that would be fraud, and there are strong anti-tax avoidance provisions in section 21 to ensure that cannot happen.
I thank the Minister's officials for their engagement with me and the persons working in my office on both this section 21 and section 11. It has been very helpful.
Section 21 is very technical. We are expecting, as the Minister outlined, more amendments on Report Stage so we have to see how this eventually shapes up but the concern expressed by myself and others about section 110 companies seems to be addressed. It is only right to say, however, that it is baffling that we are at the point where we are closing down this loophole in terms of section 110 companies. This originated from an article by Mark Tighe in The Sunday Timesin which he identified that Denis O'Brien used an ICAV and so on and brought a good deal of public attention to this matter. We know from freedom of information requests that the Revenue has been giving guidance on whether section 110 companies would continue to be treated as section 110 companies. For example, one opinion given was that if one of the properties was in default it would fall out of a section 110 if it was repossessed. I say that because while the Government continues to claim that this was never the intended use of section 110, and I take that at face value, many people knew that that is what was going on. In fact, people were advising on it, and they had the right to advise. They were doing their job in terms of providing the advice, as Revenue is obligated to do, but that should have caused concern within the Department and Revenue. This amount of public attention did not have to be drawn on it, which in my view puts pressure on the Minster's officials in terms of trying to get this measure across the line in this Finance Bill.
In terms of the difficulties we are facing into, as Deputy Donnelly said, we are not talking about the small taxpayer with the corner shop. We are talking about multi-billion euro funds that will pick through every single word, syllable, comma and full stop in this legislation to make sure there is no way around it. That is the difficulty we are in because we still have not seen the final version of it. Having said that, it does what we intended it to do, which is to close down the use of section 110 companies in the way they were being used in terms of the profit participating note to write down their tax liabilities. That will be dealt with in section 22 but it was slotted into section 21. My amendment No. 99 is crucial in that we need to have a report-----
I am keeping to the substance of it because in terms of the Minister's amendments, much of it is taken in good faith in terms of his officials in the Department working in conjunction with Revenue. They have done as much as they can to close loopholes but there are two sides to this game and we have not yet seen the other side's play. That is why it is crucial that we have a report on the effectiveness of this amendment within six months so that we are informed prior to the next Finance Bill and if it requires tweaking before that, so be it. We will come to that when we reach that point in terms of amendment No. 99.
A welcome aspect of section 110 is that the idea of mark to market is gone. William Fry states that section 110 companies being able to revalue their assets at mark to market is now gone and it makes the rules retrospective. It states:
... will potentially result in different tax treatments for a Section 110 Company depending on which of the available accounting elections it previously made for tax purposes. Some Section 110 Companies will be subject to the new rules in respect of unrecognised accounting gains that have accrued pre 6 September 2016 despite the fact that the increase in value in the assets may have occurred prior to the change in law.
Depending on whether it decided to account for fair value or book value, this will either apply or not apply to it. Clearly it will apply to everybody but in terms of the increase in value of the assets, if they have been applying a fair value then they have been recognising for accounting purposes the increase in the value each year. If they have been applying a book value they have not, therefore, the mark to market change affects those individuals.
Will the Minister of State address that? Is there anything within this section that allows section 110 companies in any way to revalue their assets in their balance sheets prior to section 21 kicking in?
The work that has been done in this regard, in so far as it has been done in the public domain, from the Government side or the Department side, has been very helpful, particularly the engagements that have been happening on this section of the Finance Bill. I know there have been a number of engagements as well between Deputy Doherty and his officials and officials in the Department of Finance which have also been very helpful. It is important that people understand that we are trying to achieve the same thing through the amendments in this section, that is, putting an end to what has been happening. I will come later to amendment No. 99 in the Deputy's name because I have a note on the ability to give meaningful information-----
The basis of the question is that some section 110 companies will be affected by this and some will not because of the way in which they deal with assets for accounting purposes. I am asking the Minister of State if, because of the accounting cycle, there is any way for a section 110 company to revalue its assets in its balance sheet prior to section 21 coming in in order that it would not be caught or affected by the section.
I will put it like this. If a section 110 company has had a certain asset for four years which has been valued at €100 and has been increasing in value by 10% each year, and if the company has adopted a fair value approach, it has recognised that increase. The reason we got rid of mark-to-market is that the increase in the value of the assets would not be taxable and that companies could bank that. Those companies that have taken that type of accounting approach have been able to bank that. Those that have taken a different approach, namely, a book value approach, have not been able to do so. I am asking whether there is a way for those companies to revalue their assets in their balance sheets?
Again, William Fry's commentary on this mentions that the carve-out for a section 110 company involved in loan origination business is a welcome amendment. The commentary refers to the current demand regarding finance in some sectors of the economy, particularly the property sector. Will the Minister of State explain to us the impact or the effect that will have on a loan originator that is a section 110 company and how it will now be deemed, as opposed to a section 110 company that is not a loan originator?
Loan originations involve the section 110 company fronting for a foreign bank and either lending directly to a larger, more sophisticated borrower or immediately issuing newly made loans to smaller borrowers from the foreign bank. Provided the foreign bank is established in one of the countries with which we have signed a double tax agreement, no Irish tax would have arisen on its interest income had it lent directly to the Irish borrowers. As the original creditor, there can be no taxable capital gain on any subsequent sale of the loans.
Will the Minister of State explain that to me? I still do not follow why the loan originator is stripped out. Would the lending by the middle man, that is, the loan originator, be tax free under this amendment?
From what I understand, if the foreign bank is established in a country with which we have a double tax agreement, no Irish tax would have arisen on its interest income had it lent directly to the Irish borrower.
Does that only apply in the case of a double tax agreement? An exemption should apply in that case because no tax would be due anyway. The Minister of State has given one example. Are there any other examples where tax would have been due and, because of this section, which deems the company a section 110 company, there is a carve-out-----
I have a brief question. In the material for the budget, I think the estimate given for the revenue to be raised by this measure is €50 million, which is small in terms of the scale of what is being talked about and the amount of tax avoidance that has been happening through section 110. How is this figure accounted for? Why is there such a gap between what is reported as going through section 110 and what could be raised and what the Department of Finance, presumably, or Revenue estimates could be raised by the measure?
In advance of the proposed changes being introduced to section 10 of the Finance Bill, Revenue undertook an examination of the financial accounts of a number of section 110 companies to determine the potential yield from any proposed changes. That is where the figure of €50 million in budget 2017 comes from. It is based on the analysis undertaken by Revenue. The figure is largely based on the potential profits made on a sample of mortgages valued at circa €1 billion held by a number of section 110 companies that were examined. The results of the examination were then extrapolated to a potential mortgage book population of €20 billion. The key assumption that underlies the figure is that only normal trading deductions were allowable, such as interest charged at the normal third party market rates in calculating the taxable profits, that is, that no deduction for profit-participating notes would have been availed of.
As the Deputy is aware, the original proposal for section 110 was published on the Department's website in September. The amendment was then redrafted and extended for inclusion in the Finance Bill, as initiated, to ensure the proposal was as targeted as possible. Legislation is now also being introduced in section 22 for funds involved in property. As I said earlier, the two issues are separate, but a number of structures involve the use of both section 110 companies and funds. The figure of €50 million does not take into account any potential behavioural changes following both amendments to section 110 and the amendments proposed for the Irish real estate fund, IREF, regime. That is how the figure was calculated. Other potentially higher figures have been put into the public domain, but as far as our planning for the finances for 2017 is concerned, it is better to go with a conservative number. It would probably be imprudent to spend on the basis of a figure which is anticipated but not yet realised.
When the Minister of State says the figure does not include anticipated or potential behavioural changes, would those behavioural changes have the impact of reducing or increasing the figure? I presume the former on the basis that these companies choose to operate in a different way because they cannot avoid tax in this way.
Taxation changes change behaviour, and that would not be unusual in this area either. However, given the changes coming in and the size of the operation in so far as the mortgage book is involved, I think the €50 million figure was included as a conservative estimate. I do not think it is anticipated that it would be less than that.
I understand from a political point of view including the figure of €50 million because if one sets expectations low and several hundred million comes in, that is great. However, even the €50 million figure shocked me as a placeholder or a lowball figure. The vulture funds control assets for which they paid about €40 billion. We have the detail on that. For example, NAMA by the end of this year will have sold about €30 billion. If IBRC, Deutsche Bank, RBS, HBOS, etc., are added on top of that, €40 billion is a conservative figure. Let us call the assets of the companies about which we are talking at €40 billion. We know from their own accounts, not just one, but multiple filed accounts, that the yield they are getting on the interest payments alone per year is 9%. That gives a yield from €40 billion of €3.6 billion. There are legitimate operating costs, but this figure is net of their bank loans. Let us take off €100 million for operating costs. That brings us down to an annual profit on interest payments alone of about €3.5 billion.
That is before we get into capital gains. Capital gains doubles it, but let us assume they do not do anything to realise the capital gains. If we just stick with the interest payments that we know they are getting from their 2014 accounts, we are looking at annual profits on interest payments from Irish businesses and Irish families of about €3.5 billion. A total of €50 million over a profit base of €3.5 billion is about 1.5%. I would assert that if we manage to get an effective tax rate of 1.4% or 1.5%, before capital gains tax, we will have failed completely in what we are trying to do. Other Irish businesses pay 12.5% corporation tax and then they pay 20% withholding tax. In the context of Deputy Paul Murphy's question and the numbers we are talking about, it is really important that we remember that this is not some marginal activity being done by some specialist funds out of New York, this is at a huge scale for the size of the country. Let us say we all meet up again next year or in two years' time – we know who the firms are - and we look at the total amount of tax that is paid, what effective percentage when we take in capital gains withholding tax would the Government say is a reasonable amount for them to have paid? If it is more than that, that is great and if it is less than that perhaps some of the loopholes I am pointing out are being used. What sort of effective rate would be a reasonable rate?
I wish to make a comment on the same issue. I know they are conservative figures but could the Minister of State give us some basis as to how the figures were calculated? Could I ask that we do not lump together the two different categories, the section 110s and the IREFs as they will be called or the QIFs and ICAVs? Could the Minister of State identify how much money he estimates will come from section 110s, and then how much money will come under section 22, which deals with the funds industry?
The figures that I have been given here were based on the work that Revenue did, as I read into the record. The figures are based on potential profits made on a sample of mortgages valued at circa €1 billion held by a number of section 110 companies that were examined. The results of the examination were then extrapolated to a potential mortgage book population of €20 billion. The key assumption that underlies the figure is that only normal trading reductions were allowable, such as interest charged at the normal third party market rates in calculating the taxable profits, that is, that no deduction for profit-participating notes would be availed of.
The amendment was published in September. It was redrafted and extended for inclusion in the Finance Bill to ensure the proposal was as targeted as possible, but it is also being included now with section 22 dealing with IREFs, as I stated, and the figure of €50 million does not take into account any potential behavioural changes following both amendments to section 110. That figure is for the section 110s and the funds. That is how that figure has been arrived at, looking at the potential of both so there is not a disaggregated figure.
I do not know if it is fair to say that. Obviously the relationship between the section 110 and what would become an IREF, what at the moment is an ICAV or a QIF, not everyone will be using a relationship there at all, and some will, so in certain instances one will not be able necessarily to disaggregate out the two as a result of that relationship. So, for example, where a section 110 might acquire the loan it might move on the asset and the asset might move into the fund. I do not know how one could potentially disaggregate out those two figures.
Part of this speaks to the Deputy’s later amendment in terms of being able to understand exactly what the impact of the changes are and what that might mean for extra money coming into the tax base. The figure of €50 million has been extrapolated by Revenue, given the work it has done to date. I will have to see if we can get more detail on how that figure was arrived at for Report Stage, and if there is a disaggregation possible there between the two sections.
I still have a question on the same issue. The response the Minister of State gave does answer the question to some degree, because it says what Revenue did was take €1 billion worth of mortgages, it calculated the extra tax that would be paid under the new regime and then it scaled it up to an asset base of €20 billion. The vulture funds have an asset base. They paid €40 billion for it and it is probably now worth €50 billion to €60 billion because there has been a significant increase in loan values and property values and repayment rates. But if we stick with the figures, a €20 billion asset base would give €50 million and they are not paying any tax at the moment. It means the total tax paid would be €50 million, which would be an effective tax rate of 2.5%, if one assumes they earn 10% a year which is roughly what they are earning. Basically, the way I read what the Revenue has done is it has said we will take €20 billion in loans, assume there is an annual profit on that of 10%, which is what we know it roughly is, so that would give a profit of €2 billion and that €2 billion profit will be taxed so that the State gets €50 million. That would be a tax rate of 2.5%, which goes back to the question I asked as that would not be an acceptable tax rate. Irish companies pay 30%. They pay 12.5% corporation tax, 20% withholding tax and then when they take their own dividends they pay income tax on top of that. What does the Government believe would be success when we sit down here next year or in two years’ time and say they have paid X%?
Obviously the rate that is being introduced in section 110, in so far as what will be paid, that is the rate that will be applied under this amendment when it is introduced. In so far as what the effective rate might look like, no one is anticipating as low an effective rate as 2.5%. Again, it is difficult to discuss this with the committee without going through what different assumptions can be made in so far as how one calculates out the profit that is being made on the assets. We can say 10% but it depends on what costs, deductions or debt can be built back into that. Unless we can sit down and do that work it will be difficult for me to comment on the figures presented by Deputy Donnelly.
In terms of the assets they have acquired, not all of them are Irish-based assets so not all of them will derive a taxable charge to the State when they are released, so we cannot just assume the total quantum based on what we have read in the media or what we might understand to be what those foreign institutional investors hold as being worth €50 billion or €60 billion. A number of those assets are not Irish assets so they cannot be included. Again, that speaks to the difficulty in trying to come to a calculation across the committee floor. We can engage on the issue again with the Deputy between now and Report Stage to make sure we are clear on how we arrived at the figure of €50 million and what we might anticipate discussing in the future, either next year or in a year and a half, depending on when the relevant accounting period is closed in order to understand what has been paid and what we would be satisfied with coming in. I do think the sum of €50 million is conservative.
If I was a vulture fund and my mates and I were managing €40 billion or €50 billion in assets and the Government said they would tax us now and “By God we estimate you are going to pay us €50 million”. I would say, "Ah that is terrible, thank you very much". I do not mean to be glib about it but it does potentially send out a signal that says “Actually we do not really expect to tax you much at all."
I think everything else in the amendment sends out the signal that we do expect to collect significant tax from the measure and that is the important signal that should be sent. When it comes to planning expenditures for 2017 it is prudent to go with a conservative estimate of €50 million.
Could I ask if the Minister of State is going to come back to the committee before Report Stage with a note on the €50 million? It is fair enough if the €50 million is a prudent figure but to also include what the Government believes would be a success in terms of what the vulture funds will pay on whatever their profits are after normal deductibles like commercial bank loans and operating costs. For example, if they pay 20% on the rest that we would consider that to be reasonable.
The intention of the provision is to introduce an anti-tax avoidance measure to stop people avoiding paying tax. That is the primary purpose of the amendment. It is not necessarily revenue raising, although we obviously recognise that as people can no longer avoid the tax they will pay money into the Exchequer.
That is the way we are proceeding on this. We will know if it is successful if we see X amount in the Exchequer coming from this. I do not know if the suggestion is possible but I will speak to officials and, if it is, we will include it.
Is the Minister of State saying that the estimate of €50 million relates to the measures in both sections 21 and 22? The budget day documentation contained the estimate of €50 million relating to section 110. It states "and funds changes" but at the time the only draft amendment we had was the one published in September and we did not have the Irish real estate fund, IREF, proposals at that stage. It seems to me that the figure of €50 million was arrived at on the basis of changes to section 110 and not the IREFs.
My officials inform me that it is based on section 21 and section 22 and that while the section 22 amendment had not been published at the time, work was already under way on its scope in order that a calculation could be made on the back of the proposed amendment.
I welcome the changes proposed in section 21 and the amendments put forward by the Minister of State. Section 110 has been in existence, in some form or another, since 1991 and can be traced back to the establishment of the IFSC. It has been rewritten several times since and has grown significantly in terms of application, with more than 3,000 companies with total assets of some €700 billion notified to Revenue up to a number of months ago as having the intention of using the section 110 structure. The vast bulk of that relates to securitisation in the financial services industry. Will the Minister of State say whether there will be any unintended spillover effect as regards the regulated funds industry in the area of securitisation?
That is absolutely crucial as far as our offering as an international financial services centre is concerned. It is a big part of what we do in the area of fund management administration. I think something like €2 trillion is administered through funds while a tiny percentage, 1% or 2%, is invested in Ireland itself. It is important we maintain this offering as part of our suite of international financial services products. In section 110 we are trying to ensure they are not being used in ways that avoid tax and that tax should be paid on Irish property or assets backed by Irish property,. That is the aim of the amendment. A lot of consultation has taken place and the amendment was published in September in order that we could get feedback, from people here in the Oireachtas and from industry and other areas, and in order that legitimate securitisation could be achieved through section 110.
I know that Revenue has been looking at this issue since November 2015 and I would hope that nobody was waiting for the media and political commentary on it. The report references November 2015 as the date Revenue began to look at the use of section 110 by property related funds. Is that the case?
That is the case. I do not want to undermine the important work that has been done and discussing this publicly in the Oireachtas has been an important component of understanding what happens and ensuring our amendments are robust in dealing with tax avoidance. Revenue was looking at it before it began to be written about and it came to the Department with its concerns. My understanding is that the Department asked for a broader look to be taken and that is where we have got to now with these amendments.
The profit participating note is the key thing. This was the mechanism that was being used to sweep profits out of a company and the pillar on which this lawful tax avoidance was built. If the profits are now to be left there and to be properly taxable in accordance with Irish law, what tax rate will apply? There are three types of gains: the interest received by the fund, the capital gain on any disposal and capital repayments in excess of the amount paid by the fund for a loan. Is this to be trading income at 12.5% or non-trading income at 25%?
The profit participating note would not have been taxed because section 110 companies were not treated as a trading company might have been. Under the changes proposed in this amendment, a non-resident investor will be subject to 25% tax when the distribution is made.
I have looked back through the Bill and I think the Minister of State said that the potential loophole whereby a vulture fund listed its loans as a residential-backed mortgage security will not be allowed and that it would not be able to list its loans in this way to avail of the exemption by virtue of not being the loan originator. Is that correct?
Does that mean it is the Government's intention that under no circumstances can any of the vulture funds that hold mortgages or commercial loans in Ireland at the moment list their loans to avoid tax?
With relevance to the following section, what is to stop a vulture fund, believing the Government has nailed section 110, moving its assets to an IREF such as a qualifying investor fund, QIF, or a qualifying investor alternative investment fund, QIAIF? Can it not do that now?
Therefore, there will be tax. The IREF is exempt from capital gains tax, CGT, but according to the clarification the Minister of State gave to Deputy Michael McGrath, by staying in section 110, CGT will be payable at 25% by such companies.
I thank the Minister of State. Using numbers to illustrate, I wish to clarify what the Minister of State told Deputy McGrath. If a vulture fund declares profits of €100 million in a given year, it can deduct commercial loans, but it must pay €25 million in tax, a rate of 25%.
I move amendment No. 85:
In page 36, line 16, to delete “applies;” and substitute the following: “applies,
(c) the portion of a specified security treated as attributable to the specified property business in accordance with paragraph (c)(ii), or
(d) units in an IREF (within the meaning of Chapter 1B of Part 27);”.
I move amendment No. 95:
In page 38, between lines 20 and 21, to insert the following: “(IV) an IREF (within the meaning of Chapter 1B of Part 27), or
(V) an investment undertaking, other than an investment undertaking which would be a personal portfolio IREF (within the meaning of section 739M) if all references in that section to IREFs were references to investment undertakings, and references to IREF assets and IREF business were references to the assets and activities of that investment undertaking,”.
I move amendment No. 96:
In page 38, to delete lines 21 to 24 and substitute the following: “(ii) as on the creation of the specified security:(I) would represent no more than a reasonable commercial return to a regulated commercial bank,and”.
(II) would not be dependent on the results of the qualifying company, and
(III) would apply to interest or other distributions payable on all existing arrangements,
I move amendment No. 99:
In page 38, between lines 36 and 37, to insert the following: “22. The Minister shall, within six months from the passing of this Act, prepare and lay before Dáil Éireann a report on the effectiveness of this amendment which is intended to restrict the use of profit participating loans where they are used to finance business of section 110 companies related to Irish property transactions.”.
I have touched on this matter. The amendment is self-explanatory. The last hour and three quarters have given enough reason to conduct a review in six months' time, if not earlier. It should happen within the Department and Revenue anyway. I am not sure as to what the Minister of State's answer will be, but the usual response when we ask for these reviews is that a cycle of a year must be allowed first. Given the fact that we are dealing with multi-billion euro funds and assets, however, it is important that we pick up on early indications to determine whether a way around the provisions has been found.
This is a different amendment than our original one on section 110 companies because the industry has been discussing mark-to-market accounting and so on. The situation has changed and there has been a response. We cannot wait until this time next year if something is identified. While officials in the Department and Revenue will continue to monitor all taxation changes, in particular these ones, which could have high-income benefits for the State, the Minister of State acknowledged the public role played by the Oireachtas. Although confidentiality in the tax system and who pays what should be maintained, a report on whether the measures are working is required so that we might be better informed on what changes, if any, need to be made at that time or in the next Finance Bill a couple of months later.
The amendment applies to accounting periods beginning on or after 5 September 2016. Given that an accounting period for tax purposes generally lasts 12 months, it is unlikely that tax returns for these companies will be filed until some time in late 2017. Therefore, as the information will not be available, it will not be practicable to prepare the report in the timeframe requested. However, officials from the Department will continue to work with the Revenue Commissioners to analyse the use of the section 110 regime and to minimise tax avoidance opportunities.
As part of section 21 of the Bill, the Minister has brought forward the timeframe in which a company that intends to use the section 110 regime must notify the Revenue Commissioners of that intention. It is proposed that a company must inform the Revenue Commissioners in writing of its intention to be a section 110 company within eight weeks of acquiring qualifying assets of €10 million, or where the information requested is not available at that time, without undue delay. Previously, a company elected into the section 110 regime when it filed its first tax return. The amount of detail required to be submitted to the Revenue Commissioners will also be greater.
These administrative changes will ensure that the Revenue Commissioners have greater oversight of the types of company and transaction in the section 110 regime in the future. For this reason, I cannot accept the proposed amendment. However, analysis of the effectiveness of the restriction of the profit participating loans may be performed when the relevant information is available.
Okay. When introducing my amendment, I acknowledged that that would be the case and that further monitoring would be needed. However, we have already amended this legislation. Not as a result of tax returns, though, and I am not asking how much money the State has collected. Rather, the industry's players are finding ways around this issue.
The report could be short. It could be to the effect that there was no evidence to suggest that the amendment had not done what it was intended to do. Various accountancy firms are advertising mark-to-market stuff on their websites, as well as other issues. A report would be appropriate. It should not be covered under the Finance Bill and I am only tabling this amendment because that is how we need to discuss it, but it is necessary that the Department and Revenue revert and explain whether they believe that this section is robust enough to do what was intended.
I bear in mind that we will not have the returns at that time, but we must ensure that people are not doing what Deputy Donnelly suggested and which the Minister of State suggested will not happen under this section. We will be able to see the moves easily. Section 110 companies are moving and some are becoming ICAVs anyway, registering with the Central Bank. The Department will be able to pick up on trends to see whether something is happening before the returns are made. That is important, given the value of the assets.
I am not asking for something that is very detailed. I am asking for something that the Department is likely to do anyway and for it to be furnished to us at an appropriate time. Six months would be that time as a staging post. Sitting here discussing next year's Finance Bill, we will still not have the returns. We will be wondering whether sections 21 and 22 worked out and the information in question will still not be available to us. We will have to rely on other indicators. If there are indicators, they should be reported to us. I bear in mind the sensitivity of this issue, as we do not want to flag potential changes and allow people to adjust for them.
I thank the Deputy. The point is well made and I understand it. It is difficult to know exactly what we will be examining. Some of it will be marketing material, as the Deputy mentioned. Officials will be monitoring this situation. I will speak with the Minister to determine whether it is possible to provide something meaningful within that timeframe that would give us an indication of how behaviour might have changed as a result of the changes made under this legislation.
I said there should be an interim measure. When we have the information, there is a need for an assessment of the effectiveness. The Department does not produce a report after a year or 15 months, when the information is there, to confirm that it is robust or otherwise. There is a need for something like it in respect of the funds industry. While I have not looked back to the debate that took place in 1977, I presume finance committees have paid little attention to changes that affect some of these sections. They are very complicated, detailed and difficult to understand unless one devotes a substantial amount of time to them. Regarding the new budgetary committee, there should be a role for the Department in bringing forward an interim report when we have more detail on the effectiveness of tax changes that were introduced, particularly substantial ones which could bring in an estimated €50 million or, hopefully, much more.
I support the amendment. Maybe six months is not possible if the information is not available. Maybe nine or 12 months is better. Wiring something into the legislation would be very useful. Say we receive the legislation in 15 months. It is possible that none of us will be in the Oireachtas in 15 months' time. Obviously, the Minister of State will be. Who knows what is going to happen? The transparency is clear. I only found out about this because I was looking at the 2014 accounts of Mars Capital. I was not looking for tax avoidance but to see what discount it had received on Irish Nationwide Building Society's mortgages, which was, from memory, approximately 72%. At the time, I had argued strongly with the Minister, Deputy Michael Noonan, that the State should not sell Irish citizens' mortgages at huge discounts to foreign debt collectors which could then evict those families from their homes. At a discount of 72%, Mars Capital paid 28 cent in the euro. Then, I found out it was not paying any tax. From memory, it was paying a few euro in tax.
The only reason I got into this was that while the section 110 companies have to file accounts publicly with the Companies Registration Office, ICAVs, QIFs, QIAIFs, and all manner of IREFs do not. I hope the Minister of State is correct about section 21, which is shutting down the vulture fund tax avoidance, and I thank his officials for all the work they have done. If we succeed in shutting it down, there will be a movement from section 110 to other tax avoidance vehicles. The problem is that the other tax avoidance vehicles do not file publicly accessible accounts, so we will not know what is going on. The media did a great job on this and legislators brought much of it to public attention, based on our ability to examine the companies' accounts. Wiring into the amendment what Deputy Pearse Doherty is seeking, maybe with a slightly longer time period to ensure we have the right information, would be very useful in that it would ensure the information comes back up. Much of the capital is about to move from the reasonably transparent world of section 110 to the completely secret world of ICAVs, QIFs and QIAIFs. We will not know what happens, given that they will not stay as section 110 companies if the Minister of State is successful.
I wanted to propose an amendment, although it does not belong in a Finance Bill. I want to ensure we change the law so the QIFs, QIAIFs, super-QIFs, super-orphan-QIFs, super-orphan-QIAIFs, ICAVs, IREFs or whatever they are, have to file publicly accessible accounts just like the section 110 companies do.
I do not disagree that we need to keep it under review. When one implements any such change in taxation, it is important that the Oireachtas does its detailed legislative work and gets to grips with the area, as Deputies Pearse Doherty and Donnelly said. There is an onus on the Oireachtas to review the changes as they happen. I am not sure to what extent we could measure the effectiveness of the amendment within six months. I am not sure what information would be available and what we could extrapolate from it. Somebody might have registered a new ICAV with the Central Bank and there might be marketing information on a legal firm’s website suggesting a particular action. However, until we see accounts we would not be able to identify a causal relationship between our legislation and certain results, and the extent of it. This is the danger of wiring the amendment into the legislation as it is.
It is about the principle of an interim report if there is evidence. It does not need to be in the Finance Bill. It is a commitment to work together and, if there are issues, to bring them to our attention and re-examine the section, so we can be prepared for next year's finance Bill. When the data become available, there should be a report on them. It should be the norm, for most tax changes of substance, that the budgetary oversight committee would examine them. I will withdraw my amendment and seek to reintroduce it on Report Stage, maybe rephrased, with a commitment from the Government that we would have a report on the effect of it as soon as the data are available.
I support the principle. It might be helpful to tie it into the work of the Committee on Budgetary Oversight in its preparation for next year’s finance Bill. This might be the best way to ensure we have something time-bound to ensure the issue is addressed in the Oireachtas.
I move amendment No. 100:
In page 38, to delete lines 39 to 41, to delete pages 39 to 41, and in page 42, to delete lines 1 to 12 and substitute the following: “(a) in section 739B(1) by substituting “In this Chapter, in Chapter 1B and in Schedules 2B and 2C” for “In this Chapter and in Schedule 2B”,
(b) by inserting after Chapter 1A the following:“CHAPTER 1BInterpretation
Irish real estate funds
739K. (1)In this Chapter—‘accounting period’ means the period for which an investment undertaking or sub-fund, as the case may be, makes up its accounts and subsections (2) and (3) of section 27 shall have application for the purposes of determining the accounting period of an investment undertaking or sub-fund;Calculating the IREF taxable amount
‘accrued IREF profits’ means the IREF profits that have arisen and accrued to a unit since that unit was acquired by the person who, on the happening of an IREF taxable event, is the unit holder;
‘arrangement’ includes any agreement, understanding, scheme, course of action, course of conduct, transaction or series of transactions;
‘connected’ has the meaning assigned to it in section 10;
‘EEA state’ means a state, not being a Member State or the State, which is a contracting party to the Agreement on the European Economic Area signed at Oporto on 2 May 1992 as adjusted by the Protocol signed at Brussels on 17 March 1993;
‘income statement’ means the profit and loss account, income statement or equivalent prepared in respect of an investment undertaking or sub-fund, as the case may be, in accordance with international accounting standards or alternatively in accordance with the generally accepted accounting practice specified in the investment undertaking’s prospectus;
‘IREF’ means an investment undertaking or, where that investment undertaking is an umbrella scheme, a sub-fund of an investment undertaking—(a) in which 25 per cent or more of the value of the assets at the end of the immediately preceding accounting period is derived directly or indirectly from IREF assets, orother than an investment undertaking within the meaning of paragraph (b) of the definition of ‘investment undertaking’ in section 739B, and where this Chapter applies to a sub-fund of an umbrella scheme, for the purposes of the calculation, assessment and collection of any tax due under this Chapter, each sub-fund of such umbrella scheme shall be treated as a separate legal person;
(b) where paragraph (a) does not apply, it would be reasonable to consider that the main purpose, or one of the main purposes, of the investment undertaking or the sub-fund, as the case may be, was to acquire IREF assets or to carry on an IREF business,
‘IREF assets’ means one or more of the following held by an IREF:(a) relevant assets (within the meaning of section 29(1A));
(b) shares in a REIT (within the meaning of Part 25A);
(c) shares deriving their value or the greater part of their value directly or indirectly from the assets referred to in paragraph (a) or (b), other than shares quoted on a stock exchange except as provided for in paragraph (b) of this definition;
(d) specified mortgages, other than those which—(i) are issued by a qualifying company as part of a CLO transaction, a CMBS/RMBS transaction or a loan origination business (each within the meaning of section 110), or(e) units in an IREF;
(ii) form part of a loan origination business of the IREF;
‘IREF business’ means activities involving IREF assets, the profits or gains of which, apart from section 739C, would be chargeable to income tax, corporation tax or capital gains tax, including, but without limitation to the generality of the preceding words, activities which would be regarded as—(a) dealing in or developing land, or‘IREF excluded profits’ means—
(b) a property rental business;(a) in relation to IREF assets (other than those referred to in paragraphs (b) to (e) of the definition of ‘IREF assets’)—‘IREF profits’ means the profits and gains of an IREF business as shown in the income statement of the IREF, any amount of the profits and gains realised on the disposal of an IREF asset (other than those referred to in paragraphs (b) to (e) of the definition of ‘IREF assets’) not otherwise shown in the income statement and excluding IREF excluded profits;(i) any profits or gains as shown in the income statement of the IREF in relation to the disposal of those assets where—(b) in relation to shares, within the meaning of paragraph (c) of the definition of ‘IREF assets’, any distribution made in relation to those shares, and(I) such asset was acquired otherwise than through a transaction in respect of which relief was availed of under section 615 or 617,(ii) any unrealised profits or gains as shown in the income statement of the IREF in relation to those assets where—
(II) such asset was held by the IREF, or an investment undertaking of which the IREF is a sub-fund, for a period of at least 5 years from the date on which it was acquired, and
(III) the disposal of such asset would, but for section 739C, be a chargeable gain subject to capital gains tax or corporation tax on chargeable gains,(I) such asset was acquired otherwise than through a transaction in respect of which relief was availed of under section 615 or 617, and
(II) the disposal of such asset would, but for section 739C, be a chargeable gain subject to capital gains tax or corporation tax on chargeable gains,
(c) in relation to shares, within the meaning of paragraph (b) of the definition of ‘IREF assets’, any profits or gains other than property income dividends in relation to those shares;
‘IREF taxable amount’, in relation to an IREF taxable event and a unit holder, means an amount calculated in accordance with section 739L;
‘IREF taxable event’ in respect of a unit holder means—(a) the making of a relevant payment,‘IREF withholding tax’, in relation to an IREF taxable event, means a sum representing income tax at a rate of 20 per cent on the IREF taxable amount;
(b) the cancellation, redemption or repurchase of units from a unit holder, including on a liquidation,
(c) any exchange by a unit holder of units in a sub-fund of an investment undertaking for units in another sub-fund of that investment undertaking,
(d) the issuing of units as paid-up, otherwise than by the receipt of new consideration,
(e) an IREF ceasing to be an IREF including on it ceasing to be an investment undertaking or on it ceasing to have 25 per cent of its value derived from IREF assets,
(f) the disposal of a unit by a unit holder, other than in circumstances that would give rise to an IREF taxable event under paragraph (b) or (c), or
(g) the sale or transfer of the right to receive any of the accrued IREF profit without the sale or transfer of the unit to which the accrued IREF profit relates or where the accrued IREF profit in respect of the unit becomes receivable otherwise than by the unit holder;
‘purchased IREF profits’ means the IREF profits which have arisen and accrued to a unit prior to that unit being acquired by the unit holder;
‘relevant payment’, means a payment including a distribution, whether in cash or non-cash, made to a unit holder by an IREF by reason of the rights conferred to the unit holder as a result of holding a unit or units in the IREF, other than a payment made in respect of the cancellation, redemption or repurchase of a unit;
‘specified person’ means a unit holder in respect of which a gain is not treated as arising to an investment undertaking on the happening of a chargeable event under subsection (6), (7), (7A) (as it applies to a declaration made under subsection (6) or (7)), (7B) (as it applies to a declaration made under subsection (7) or (9)), (8), (8A), (8D), (8E), (9) or (9A) of section 739D, but shall not, subject to 739M, include—(a) a fund approved under section 774, 784(4) or 785(5), a PRSA within the meaning of section 787A, or a person exempt from income tax under section 790B,(2) In calculating the portion of the value of assets of an investment undertaking or sub-fund attributable to IREF assets for the purposes of determining whether or not an investment undertaking or sub-fund is an IREF—
(b) an investment undertaking,
(c) a company carrying on life business (within the meaning of section 706),
(d) a person who is exempt from—(i) income tax under Schedule D by virtue of section 207(1)(b), or(e) a credit union,
(ii) corporation tax by virtue of section 207(1)(b) as it applies for the purposes of corporation tax under section 76(6),
(f) a scheme, undertaking or company equivalent to those referred to in paragraphs (a) to (c), authorised by a Member State or an EEA state and subject to supervisory and regulatory arrangements at least equivalent to those applied to those schemes, undertakings or companies, as the case may be, in the State, or
(g) a qualifying company, within the meaning of section 110,
where the IREF is in possession of a valid declaration, in accordance with Schedule 2C, immediately before the IREF taxable event;
‘TIN’ has the meaning assigned to it in section 891F and includes a tax reference number as defined in section 891B;
‘umbrella scheme’ has the meaning given to it in section 739B.(a) account shall not be taken of any arrangement that—(i) involves a transfer of assets, other than IREF assets, from a person connected with—(b) regard shall be had to the gross value of the assets of which the IREF asset is part.(I) the investment undertaking or sub-fund, as the case may be,(ii) the main purpose or one of the main purposes of which is the avoidance of tax under this Chapter,
(II) a unit holder in the investment undertaking or sub-fund, and
739L. The IREF taxable amount in relation to an IREF taxable event shall be calculated as:
A x B-D
where—Anti-avoidance: multiple funds
A is the portion of the IREF taxable event which is attributable to the retained profits of the IREF,
B is the portion of the retained profits of the IREF attributable to the IREF business, or a business which would be considered an IREF business if it was carried on after 1 January 2017,
C is the retained profits of the IREF, excluding any amounts referred to in paragraph (b) of the definition of ‘IREF excluded profits’,
D is the purchased IREF profits not previously distributed by the IREF.
739M. (1)In this Chapter—‘personal portfolio IREF’ means an IREF under the terms of which some or all of the IREF assets or IREF business may be, or was, selected or influenced by—Anti-avoidance: profit stripping(a) the unit holder,(2) For the purposes of subsection (1) and without prejudice to the application of that subsection, the terms of an IREF shall be treated as permitting the selection referred to in that subsection where—
(b) a person acting on behalf of the unit holder,
(c) a person connected with the unit holder,
(d) a person connected with a person acting on behalf of the unit holder,
(e) the unit holder and a person connected with the unit holder, or
(f) a person acting on behalf of both the unit holder and a person connected with the unit holder.(a) the terms of that IREF or any other agreement between any person referred to in that subsection and that IREF—(3) A scheme, undertaking or company, as referred to in paragraphs (a) to (c) or (f) of the definition of ‘specified person’ in section 739K, shall be a specified person where—(i) allow the exercise of an option by any person referred to in that subsection to make the selection referred to in that subsection,(b) the unit holder or any person connected with the unit holder has or had the option of requiring that IREF to appoint an investment advisor (regardless how such a person is described) in relation to the selection of IREF assets or business, or the conduct of the IREF business.
(ii) gives that IREF discretion to offer any person referred to in that subsection the right to make the selection referred to in that subsection, or
(iii) allow any of the persons referred to in that subsection the right to request, subject to the agreement of that IREF, a change in those terms such that the selection referred to in that subsection may be made by any of those persons,
or(a) the IREF is a personal portfolio IREF in respect of any of the unit holders, or
(b) (i) that scheme, undertaking or company, as the case may be, would, if it was an IREF and if the holding of the units in the IREF was part of its IREF business, be regarded as a personal portfolio IREF in respect of any of its unit holders, and(ii) it would be reasonable to consider that the investment in the IREF by the scheme, undertaking or company was part of a scheme or arrangement the main purpose, or one of the main purposes, of which was the avoidance of tax under this Chapter.
739N. (1) Where—Tax arising on IREF taxable event(a) an IREF taxable event in relation to a personal portfolio IREF derives some of its value from profits referred to in paragraph (a) (ii) of the definition of ‘IREF excluded profits’ (in this section referred to as ‘unrealised profits’), and(2) An amount of IREF withholding tax due under this section shall be included in the return required under section 739R.
(b) the asset to which those profits relate is subsequently disposed of in a manner that the profits or gains do not fall within paragraph (a)(i) of the definition of ‘IREF excluded profits’,
then the disposal of that asset shall be an IREF taxable event and the IREF will be required to pay to the Revenue Commissioners, not later than 30 days after the date of that disposal, an amount equal to the IREF withholding tax on the portion of the unrealised profits the value of which has already been realised by the unit holders through past IREF taxable events.
739O. (1)In this section a ‘holder of excessive rights’ means a person who is beneficially entitled, directly or indirectly, to at least 10 per cent of the units in an IREF.(2) Notwithstanding any other provision of the Tax Acts—Withholding tax arising on IREF taxable event(a) for the purposes of affording relief under an arrangement made with the government of a territory outside the State having the force of law under the procedures set out in section 826(1), the IREF taxable amount in respect of an IREF taxable event and a unit holder—(i) who is a holder of excessive rights, is income from immovable property, and(b) in respect of a unit holder, the IREF taxable amount shall be chargeable to income tax under Case V of Schedule D and shall be treated as income—
(ii) who is not a holder of excessive rights, shall be treated as a dividend,(i) arising in the year of assessment in which the IREF taxable event occurs, and(c) to the extent to which profits or gains of a basis period for a year of assessment consist of profits or gains to which this Chapter applies, those profits or gains—
(ii) against which no loss, deficit, expense or allowance may be set off,(i) shall be chargeable to income tax for that year, subject to section 739Q, at the rate of 20 per cent, and(d) the provisions of section 188, and the reductions specified in Part 2 of the Table to section 458 shall not apply as regards income tax so charged.
(ii) shall not be reckoned in computing total income for that year for the purposes of the Income Tax Acts,
739P. (1) On the happening of an event mentioned in paragraphs (a) to (e) of the definition of ‘IREF taxable event’ in respect of a specified person—Repayment of IREF withholding tax(a) the IREF shall deduct IREF withholding tax out of the IREF taxable amount,(2) On the happening of an event mentioned in paragraph (d) of the definition of ‘IREF taxable event’ in respect of a specified person, to satisfy the requirements of paragraphs (a) and (b) of subsection (1), the IREF shall reduce the amount of the additional units to be issued to the specified person by such amount as will secure that the value at that time of the additional units issued to the specified person does not exceed an amount equal to the amount which the person would have received, after deduction of IREF withholding tax, if the person had received the value of the IREF taxable event in cash instead of in the form of additional units in the IREF.
(b) the specified person shall allow such deduction referred to in paragraph (a) on the receipt of the residue of the IREF taxable amount, and
(c) the IREF shall be acquitted and discharged of so much money as is represented by the deduction referred to in paragraph (a) as if that amount of money had actually been paid to the specified person.
(3) Where the IREF taxable event consists of a non-cash amount, the IREF—(a) shall be liable to pay to the Collector-General an amount (which shall be treated for the purposes of this Chapter as if it were a deduction of IREF withholding tax in relation to an IREF taxable event) equal to the IREF withholding tax which, but for this subsection, would have been required to be deducted from the amount of the IREF taxable amount,(4) (a) Subject to paragraph (b), the amount of IREF withholding tax deducted in respect of a unit holder in accordance with this section shall be treated as a payment on account of the income tax chargeable on that unit holder on that IREF taxable event for that year of assessment and where that payment on account equals the income tax payable under section 739O, that unit holder shall not, in respect of the IREF taxable event, be regarded as a chargeable person within the meaning of Part 41A.
(b) shall be liable to pay that amount in the same manner in all respects as if it were the IREF withholding tax which, but for this subsection, would have been required to be deducted from the IREF taxable amount, and
(c) shall be entitled to recover a sum equal to that amount from the specified person as a simple contract debt in any court of competent jurisdiction.(b) Where IREF withholding tax is paid in accordance with subsection (3), the unit holder shall not be entitled to treat the IREF withholding tax as a payment on account until such time as the debt to the IREF is repaid.(5) Other than as otherwise provided for in section 739Q, no repayment of any IREF withholding tax shall be made to any person receiving or entitled to the IREF taxable amount.
739Q. (1)In this section, ‘relevant person’ means a specified person, who during an accounting period was subject to withholding tax on an IREF taxable event and would but for section 739P be entitled to a repayment of tax.(2) Notwithstanding section 739P(5), repayment of IREF withholding tax in respect of an IREF taxable event shall be made to a relevant person to the extent provided for in an arrangement made with the government of a territory outside the State having the force of law under the procedures set out in section 826(1) and the rate of tax specified in section 739O(2)(c) shall be the rate applicable pursuant to the relevant arrangement.Returns, payment and collection of IREF withholding tax
(3) Notwithstanding section 739P(5), where a scheme, undertaking or company, as referred to in paragraphs (a) to (c) or (f) of the definition of ‘specified person’, can prove—(a) that it has indirectly invested in units of an IREF,then that scheme, undertaking or company, as the case may be, shall be entitled to make a claim to the Revenue Commissioners for repayment of that withholding tax in the form prescribed by the Revenue Commissioners and the rate of tax specified in section 739O(2)(c) shall be reduced accordingly.
(b) that the IREF would not be regarded as a personal portfolio IREF of that scheme, undertaking or company, and
(c) that an amount of withholding tax was operated on an IREF taxable event to which it is indirectly entitled which is not otherwise repayable,
739R. (1)Notwithstanding any other provision of the Tax Acts, this section shall apply for the purposes of regulating the time and manner in which IREF withholding tax shall be accounted for and paid.(2) An IREF shall for each accounting period make to the Collector-General a return, in accordance with subsections (3) and (4), of the IREF withholding tax in connection with an accounting period—Statement to be given to recipients on the making of an IREF relevant payment(a) which ends on or before 30 June in a financial year, within 30 days of 31 December of that year, and(3) The IREF withholding tax which is required to be included in a return referred to in subsection (2) shall be due at the time by which the return is to be made and shall be paid by the IREF to the Collector-General and subsections (3) to (9) of section 739F shall apply to IREF withholding tax, with any required modifications, as they apply to the appropriate tax.
(b) which ends between 1 July and 31 December, within 30 days of 30 June of the following year.
(4) The return referred to in subsection (2) shall contain the following details:(a) the name and tax reference number of the IREF in respect of which the IREF taxable event occurred;
(b) the name, address, TIN and unit holding of each unit holder in respect of whom the IREF taxable event happened;
(c) the date on which the IREF taxable event occurred;
(d) the amount of the IREF taxable event for each unit holder;
(e) the amount of IREF withholding tax (if any) in relation to the IREF taxable event deducted by the IREF in respect of each unit holder.
739S. (1) Every IREF shall, at the time of the IREF taxable event (within the meaning of paragraphs (a) to (e) of the definition of ‘IREF taxable event’), give the unit holder a statement in writing, or by means of electronic communications, specifying the following details:Deduction from consideration on the disposal of certain units(a) the name and address of the IREF;(2) Section 152(2) shall apply to the failure by an IREF to comply with this section, with any necessary modifications.
(b) the name and address of the unit holder;
(c) the date the IREF taxable event occurred;
(d) the IREF taxable amount;
(e) the amount of the IREF withholding tax deducted in relation to the IREF taxable event.
739T. (1)This section—(a) applies on the happening of an event specified in paragraph (f) or (g) of the definition of ‘IREF taxable event’, in respect of a specified person, and(2) On payment of any consideration in relation to the happening of an IREF taxable event to which this section applies—
(b) shall not apply where the amount or value of any consideration payable in relation to the happening of such an IREF taxable event does not exceed the sum of €500,000; but where the taxable event involves a disposal, sale or transfer by the unit holder in parts—(i) to the same person, or
(ii) to persons who are acting in concert or who are connected persons,
whether on the same or different occasions, the several disposals, sales or transfers shall, for the purposes of this paragraph, be treated as a single disposal, sale or transfer.(a) the person by or through whom any such payment is made shall deduct from that payment a sum representing an amount of income tax equal to 20 per cent of that payment,(3) (a) Notwithstanding any other provision of the Tax Acts, this subsection shall apply for the purposes of regulating the time and manner in which the withholding tax deducted under this section shall be accounted for and paid.
(b) the person to whom the payment is made shall allow such deduction on receipt of the residue of the payment, and
(c) the person making the deduction shall, on proof of payment to the Revenue Commissioners of the amount so deducted, be acquitted and discharged of so much money as is represented by the deduction as if that sum had been actually paid to the person making the disposal.(b) The person who was required to deduct the withholding tax under this section shall, within 30 days of the date of the IREF taxable event, deliver to the Revenue Commissioners an account of the IREF taxable event and of the amount deducted.(4) The amount of withholding tax deducted in respect of a unit holder in accordance with this section shall be treated as a payment on account of the income tax chargeable on that unit holder on that IREF taxable event for that year of assessment.
(c) The account referred to in paragraph (b) shall contain details of the following:(i) the name and tax reference number of the IREF in respect of which the IREF taxable event occurred;(d) Income tax which by virtue of this section is payable by a person shall—
(ii) the name, address, TIN and unit holding of the unit holder in respect of whom the IREF taxable event occurred;
(iii) the date on which the IREF taxable event occurred;
(iv) the amount of the consideration paid or payable to the unit holder;
(v) the amount of withholding tax deducted under this section.(i) be payable by that person in addition to any income tax which by virtue of any other provision of the Tax Acts is payable by that person,(e) Where, in relation to any payment of withholding tax referred to in paragraph (b), any person has made default in delivering an account required by this section, or where the Revenue officer is not satisfied with the account, the officer may estimate the amount of the payment to the best of his or her judgment and, notwithstanding section 18, may assess and charge that person to income tax for the year of assessment in which the payment was made on the amount so estimated at the rate of 20 per cent.
(ii) be due within 30 days of the IREF taxable event, and
(iii) be payable by that person without the making of an assessment.
(5) Repayment of withholding tax deducted in respect of a unit holder in accordance with this section in respect of an IREF taxable event shall be made to a relevant person, within the meaning of section 739Q, to the extent provided for in an arrangement made with the government of a territory outside the State having the force of law under the procedures set out in section 826(1) and the rate of tax in section 739O(2)(c) shall be the rate applicable pursuant to the relevant arrangement.
(6) A claim for repayment of any withholding tax deducted under this section which is in excess of the income tax chargeable on the IREF taxable event under section 739O shall be made by the unit holder in a return, made in accordance with Part 41A, and no other repayment of any amount of such withholding tax shall be made.
Retention and examination of documentation
Declaration of PRSA Administrator
Declarations of investment undertakings
Section 22 provides for the introduction of a tax regime for IREFs, by inserting a new Chapter 1B into Part 27 and a new Schedule 2C into the Taxes Consolidation Act 1997. Amendments are being made simultaneously to section 21 of the Bill, which amends section 110 of the Taxes Consolidation Act 1997, to ensure there is no scope for arbitrage between the two areas. This has proved to be a difficult and complex issue, and the amendments required to address this issue in the Bill as published, in the first instance, and the new replacement Chapter which I am proposing, indicates the complexity of this topic. In order to provide coherent legislation to the committee, the original section 22 is being deleted and replaced with a new section. These amendments reflect further consideration of the provision in the light of feedback and commentary received by my Department and the Office of the Revenue Commissioners since publication. Further stringent anti-avoidance provisions have been included. These changes will act to ensure the provisions operate as intended and that the Irish tax base is protected. The objective of these provisions is to provide for the introduction of a taxation regime for investment undertakings, where 25% of the value of that undertaking is made up of Irish real estate assets. These amendments do not in any way reduce the tax payable by funds and any exemptions provided for in the provision are merely a restatement of existing exemptions. The IREF must deduct a 20% withholding tax on certain property distributions. The amendment addresses the issue of non-resident investors who have been investing in Irish property through fund structures, thus avoiding a charge to tax on profits arising from Irish real estate. The 20% withholding tax will not apply to certain specific categories of investors who provide appropriate declarations, including pension funds, life assurance companies and other collective investment undertakings. This mirrors similar exemptions set out in the tax code for investment by these entities generally. In the new section, I am extending the list of exempt entities to include charities and credit unions. I will outline the other additions to the section.
Section 739K(1) contains the definitions that apply to Irish real estate funds, IREFs. The primary definitions that have been updated in this section include "IREF assets" and "IREF business" and these are being extended to include "specified mortgages" under section 110 of the Taxes Consolidation Act 1997 and shares in real estate investment trusts, REITs. The broadening of the definitions ensures they encompass other types of property assets rather than just traditional land and property. They are also being recast to prevent a number of avoidance opportunities presented by the original drafting. The definition of "IREF excluded profits" is being inserted to draft the original provision more accurately, which excludes gains on assets held for longer than five years from the calculation of the IREF's profits. The definition of "IREF profits" is being updated to ensure the IREF profits are calculated in accordance with accounting rules, and the definition of "specified person" is being updated to extend the unit holders that would be exempt from the withholding tax to include charities and credit unions, as I have already mentioned.
Section 739K(2) sets out the mechanism for calculating the value of assets of an investment undertaking or sub-fund which is attributable to an IREF. Section 739L provides the formula for determining the IREF taxable amount. It is based on the retained earnings of the IREF and the portion of those referable to the IREF business. It excludes any amount of profit which was purchased by the unit holder on acquiring the units. Section 739M is an anti-avoidance provision which mirrors the personal portfolio investment undertaking, PPIU, legislation. The section ensures that IREF withholding tax cannot be avoided by placing a pension scheme, investment undertaking, company carrying on life business or fund above the IREF. Section 739N is an anti-avoidance provision to ensure an IREF cannot avoid IREF withholding tax by distributing the unrealised profits on real land in the State prior to their sale and subsequently disposing of an asset within the five-year window. In such circumstances, the disposal of that asset will be an IREF taxable event. The IREF will be liable to pay the IREF withholding tax within 30 days after the date of disposal on the applicable portion of the unrealised profits.
Section 739O provides for the taxation of IREF taxable events. This section will ensure that where the non-resident investor holds more than 10% of the IREF, the income they receive from the IREF will be treated as "income from immovable property". Ireland retains primary taxing rights to such income under our double tax agreements, meaning the rate of 20% cannot be reduced by a claim under such an agreement. This is in line with OECD guidance. Section 739P provides for the manner by which the IREF withholding tax is to be deducted. Section 739Q provides for the repayment of IREF withholding tax under double taxation agreements. Only the part of the IREF taxable amount which is to be treated as a dividend under section 739O may be applicable for relief under a double taxation agreement. The State retains taxing rights for income from immovable property. Section 739R sets out details regarding the time and manner in which the IREF withholding tax is to be accounted for and paid. Section 739S sets out the details which the IREF must give to its unit holders at the time of the taxable event.
Section 739T provides for a deduction of 20% of the total proceeds where the taxable event is one to which the IREF is not party, for example the sale of units rather than the redemption and issuance of units. Based on the capital gains tax withholding tax in section 980, this section applies where the amount or value of the consideration exceeds €500,000. The section sets out the mechanism of how the tax is to be collected and the procedure for claiming a repayment where applicable. Section 739U sets out requirements for the IREF to keep and retain the declarations which are made in accordance with Schedule 2C, the new Schedule which sets out the declarations required under chapter 1B relating to an IREF.
One final provision, section 739V, relating to IREFs transferring their undertakings to normal trading companies, is also proposed. In effect, I am proposing that an investment undertaking may opt to convert from an investment undertaking into a company which is subject to the general corporate taxation regime. The conversion will constitute an IREF taxable event, which can be deferred. This option to convert from an IREF to a company will be time bound and must be carried out by 1 July 2017. This provision does not permit any form of tax avoidance and will be subject to stringent conditions as set out in the legislation. This provision is being included to maintain the consistency with the "step into shoes" principle that is provided for throughout the tax Acts. Any income tax, corporation tax or capital gains tax will be ultimately borne by the new company and the stamp duty will remain payable by the final non-connected purchaser as standard. The section applies to accounting periods commencing on or after 1 January 2017. If a decision is made by an investment undertaking on or after 20 October 2016 to change their accounting period, the section shall then apply to that accounting period commencing on or after 20 October 2016.
I am confident that the legislation, which introduces a dedicated regime for holding Irish property, strikes the appropriate balance between attracting long-term sustainable capital to the Irish property market while ensuring in so far as possible that the taxing rights from Irish real estate are retained in the Irish tax base. I commend these amendments to the committee. Due to the complexity of these issues, I would like to let the committee know that the Minister may bring forward further amendments on Report Stage.
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.
What we are trying to do with the amendment is capture non-resident investors who are investing in property and not paying tax. It is a taxing right of the State to tax property. Irish residents and non-residents are treated differently in so far as the level of taxation they might pay is concerned and that is right and fair because people are resident in the State and see a return on the taxes they pay, while a non-resident investor will not. At the same time, that is not to say taxes should not be paid on the transaction made. What we are trying to do is capture that element. This is not about new tax avoidance measures; rather, it is about introducing new taxation. The measure does this in respect of the withholding tax of 20% on the distribution from funds and capital gains tax if an asset is disposed of within five years. These are the two new taxes we are trying to introduce in respect of funds provided certain criteria are met as to the level of property such funds hold. The criteria are set out in the amendments. This is not about exempting companies from capital gains tax. it is about introducing capital gains tax where an asset is disposed of within five years.
Obviously, there is a policy decision. As one looks to see how one will treat funds now and how they were treated previously and sees what the appropriate way to tax them is, one brings in the withholding tax, as appropriate. Then one sees that, from a policy point of view, one could introduce capital gains tax, but perhaps one could also use it as an incentive to hold on to property for longer and make a proper investment in the State rather than flip assets for a gain. That is the purpose of the provision that has been introduced on capital gains tax where an asset is disposed of within five years. It is not going to impact on REITS in the way Deputy Stephen S. Donnelly fears. As outlined, the advice is that it will not impact on REITS in that way. In so far as life assurance companies are concerned, we treat them as pension funds and they are exempt under taxation Acts generally. We are discontinuing this in so far as the amendment is concerned.
The exclusion of investment undertakings is provided for to ensure transfers between investment undertakings will not have the withholding tax applied. However, when the final transaction occurs, it will be a taxable event under the amendment in so far as an IREF is concerned and withholding tax will be applied. That is per the last-man-standing principle where there might be a couple of funds in the chain.
Capital gains tax is paid. It is not true that introducing capital gains tax for the first five years and then exempting afterwards represents a new tax. Pension funds are exempt from pretty much everything, but property companies pay capital gains tax. This is not the same as share gains. It is not like the situation where a US investor buys shares in CRH which double in value and pays no capital gains tax here. That is true, but these are property assets. If one buys a hotel for €10 million and sells it for €20 million, one pays capital gains tax. The only real exemptions are for pension funds because they just do not pay tax. It is not the case that, in essence, capital gains tax is not charged on property assets in this country. I am pretty sure they are.
If a hotel group - a trading company - purchases and sells a hotel, capital gains tax will be due. However, as it stands, it is not due on funds. That is what we are bringing forward where assets are disposed of within five years.
If a hotel group manages five hotels, is a hotel group and a trading company within Ireland; it comes under all of the typical resident taxation laws that apply. What has been identified is the situation where funds have made a particular play as far as property or property-backed assets are concerned and trying to capture it as a taxable event. The gross roll-up regime is the mechanism by which investment funds are not subject to taxation within the fund in so far as allowing the fund to grow is concerned and only taxing when there is an exit from the fund where a taxable event occurs. This has been explained before at the committee. That is where we include the withholding tax in the amendment. That would capture it in so far as the fund was concerned. That is how the fund will grow without deductions for taxation.
That is not my understanding. The Minister of State has given the example of the gross roll-up of gains for seven years within a qualified investment fund. On exiting, one is taxed on the capital gains and is not CGT exempt. If the Minister of State and I wanted to set up a property ownership fund rand go out and buy three hotels, we could include it in a qualified investment fund and all of the interest and income and capital related profits would not be subject to a penny of tax for seven years. However, at the end of the seven years, we would pay capital gains tax. That is not the case now and this will exempt us from doing it.
There is a misunderstanding between capital gains tax in share ownership which is paid in the country where the person lives and capital gains tax on physical assets which is paid in the country where the assets are. If one buys a hotel in New York and sells it at a profit, the United States will apply capital gains tax. If one buys shares from a company based in New York which double in value, the Irish State will tax one on the gains when one sells them. Capital gains tax is applied to physical assets in the country where they are to be found. Anyone in Ireland who buys an apartment in France, Turkey or the United Kingdom and sells it will pay capital gains tax in these countries.
As it stands, if one is an Irish investor and the distribution is made at the seven or eight year mark, one will pay at a rate of 41% on the distribution. If one is non-resident, one will not pay anything. The set-up on an investment in a property abroad depends on the arrangements made between the two jurisdictions. It is my understanding that the Deputy's example in New York would not apply in the case of the United Kiingdom. It depends on the two jurisdictions and where the investment is made.
If an Irish citizen buys an apartment in France and sells it for a profit of €100,000, the French Government will apply capital gains tax. If an Irish resident buys an apartment or a hotel in Ireland and sells it for a profit of €10 million, up until this provision is enacted, he or she will pay capital gains tax. In addition to the point made by the Minister of State, he or she will pay income taxes. Let me explain how it works. Within the company he or she will pay corporation tax and capital gains tax and will then disperse the profits. Withholding tax is applied to the profits and the profits that accrue to the individual are taxed as personal income. It is completely normal business practice for capital gains to be taxed within a company. The person concerned receives credit for the withholding tax.
What we are trying to address is how we can get the appropriate amount of taxation from a fund where previously no taxes were paid on these activities. That is the purpose of the amendment and what we are trying to capture. An Irish resident would avail of the gross roll-up regime. In that regard, we are going to say it will be a chargeable event and that an exit tax will have to be paid. It will be charged at a marginal rate for an investor as an individual or at a rate of 25% for a passive corporate investor. There is nothing applied to the non-resident investor. What we are trying to make sure, in so far as non-resident investors are investing in Irish property, is that there will be a tax liability, in terms of a withholding tax to be paid on distributions made to non-resident investors. We are also introducing the CGT charge where they dispose of the asset within five years. This is a policy decision to try to incentivise the holding of property by non-resident investors for longer than five years.
I appreciate that is what the amendment is trying to do, but I just do not believe that is what it will do it. Certain assumptions have been made. For example, capital gains tax is currently not charged on property related profits. The amendment will introduce it if there is a flip within five years. I believe capital gains tax is applied to profits generated from property.
Let us consider both. If an Irish citizen living in Ireland buys a hotel for €10 million and sells it for €20 million, he or she will pay capital gains tax on the €10 million profit. In this new world he or she will not do so.
If one buys a hotel and places it in the ownership of a qualified investment fund, one will not pay tax for seven years. At the end of the seven year period the fund will pay tax. It will then distribute the post-tax profits and a person will pay income taxes on disbursement because it is part of one's income.
Let me explain the purpose of the amendment. The gross roll-up regime is time-capped for Irish resident investors. That means that when there is distribution, the investor will pay tax at that point in time at the marginal rate. Currently, for a non-resident investor, there is no distribution in the seven or eight-year period; therefore, there is no taxable event and, effectively, no tax may be paid. We are trying to capture this because of what is known to be happening here. We want to bring forward a withholding tax. There are different provisions to make sure, regardless of what tax treaties are in place, the amount or percentage cannot be deducted and that if one has a controlling interest in an IREF, one will not be able to avoid paying the withholding tax.
On the assumption from which the Deputy began, on the CGT liability for an Irish investor, I do not think it is true. In terms of the tax avoidance measures and what we are trying to achieve in this section, the Deputy and I are trying to achieve the same thing. We want to make sure that we will not be back here in 12 months saying the Deputy was correct or not, as the case may be. We want to make sure we have the correct amendment.
There has been a misunderstanding of the way funds are treated for tax purposes and of what this change will mean. It will not bring new possibilities to avoid tax. It will not change the current position for Irish investors in funds. The purpose is to introduce two new taxes.
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.
For clarity regarding the previous discussion with Deputy Donnelly, which Deputy Pearse Doherty picked up on as well, the current situation is that the normal tax treatment afforded to Irish collective investment funds means that the moneys invested are allowed to grow on a tax-free basis within the fund. The income is taxed at the level of the investor rather than the fund, as is standard international practice. To ensure that the appropriate tax is collected from Irish investors, funds are obliged to operate an exit tax regime and remit the tax deducted in this manner to the Revenue Commissioners. This charge to tax does not apply in the case of unit holders who are non-resident. In the case of non-resident investors, their liability to tax on gains from a fund will be determined in their home jurisdiction. The broad rationale for exempting such funds from direct taxation is to facilitate individuals to invest collectively without suffering double taxation. Most OECD countries do that. We are trying to change that in this amendment in order to introduce a chargeable or taxable event for this new type of fund under section 22, which will be the IREF.
The first point Deputy Pears Doherty raised related to the CGT. The current position is that funds are exempt from Irish taxes on all income, profits and capital gains. They are long-term investment vehicles and, in general, funds acquire assets for the long term as a source of income rather than to try to flip them and make a short-term capital profit. However, due to what has been happening here, which we are trying to address in this amendment, any distribution from the rents arising from the property held by the fund will be subject to the 20% withholding tax. To encourage stability in the market and longer-term investment by funds, the Minister decided to impose the withholding tax on distributions of gains made on the short-term holding of property. This should discourage funds from acquiring property with a view to a short-term profit. Furthermore, and this speaks to the Deputy's point, the provision is designed to encourage sustainable investment focused on the long-term holding of income-producing rental property and, in the longer term, to lead to a more sustainable, secure property market for both investors and property tenants, while generating regular and reliable tax revenues for the Exchequer from the taxation of rental profits. Although any gain may be exempt where the property is held for more than five years, tax will still be payable on the rental income that is being generated. This exemption reflects the current position regarding CGT and funds and does not reduce the current tax burden on funds. It does not, therefore, give rise to additional cost. By way of comparison, there is a full exemption for non-residents from UK capital gains tax on all commercial property gains in that jurisdiction, no matter what type of structure is used for investment purposes.
With regard to the 25% threshold, if more than 25% of the value of funds is in Irish real estate assets - they own them - they will become this new IREF. There is also a main purpose test to avoid some of the concerns the Deputy outlined, in so far as the dilution of a portfolio might take place. If the main purpose of the fund is to invest in Irish real estate, then the percentage invested will not matter. There are 96 Irish funds that hold approximately €10.6 billion of Irish real estate between then. Most of these funds hold only Irish real estate and, as a result, the 25% threshold will not be relevant in the majority of cases. From a regulatory perspective, funds have always been in a position to hold some property. It was felt that it was not necessary to deter funds completely from investing in Irish property. The pension funds of Irish taxpayers invest in these funds and those taxpayers and pension funds wish to be in a position to invest in a diversified portfolio of assets. What we are trying to address here is this leakage to the Irish tax base.
This is why we are looking at these 96 funds. If their main purpose is holding Irish property, the percentage will not matter. In so far as the 96 funds are concerned, this is what they are doing. The threshold is there because we need a threshold, but the main purpose test will capture anyone falling out of it for one reason or another.
It is not true the threshold is there because a threshold is required. This is not a true statement. A threshold is not needed. There is absolutely no reason to need a threshold. The Minister of State has not given a reason for having a threshold, bar that he does not want to discourage funds from investing in property. They can invest in property. Even if property makes up 1% of a portfolio, we must remember 1% could mean a property of several hundred million euro which could see gains of hundreds of million of euro. If 1% of a portfolio is in property, it should be taxed here and 20% dividend withholding tax should be paid by foreign investors. This will not scare the horses. It is what will apply for the majority of funds, as the Minister of State has said. A number of funds are not solely property based and have mixed assets in their portfolio, and new funds will come into the market and into operation with mixed portfolios. They will look at this legislation. If the Minister of State was to decide now what to do with regard to a fund, would he set up four different funds with investment in health, energy, property and the environment, or combine them into one fund and ensure the property part is below 25%? Of course this is how he would manage it. There is no reason for a 25% threshold. If we accept the principle that income deriving from property in the State should be taxed, then the 25% ratio should not exist.
With regard to capital gains tax, CGT, the IMF warned in September about ramping up commercial property as a result of these funds buying through tax-free vehicles. Moody's warned if the horses get scared and leave, we will have a serious problem in commercial property. I believe the reason the Minister of State is introducing the 5% is because if the funds did decide to leave, commercial property would be on the floor. Who would this affect? It would affect banks and NAMA. I am very clear on this. The fund industry overseen by the Government has allowed Ireland to be sold tax free. A total of 67% of commercial property has been bought by external investors, and more than 40% of commercial Dublin has been flipped over the past three years. Ireland has been sold under our feet, tax free, to these funds. The big benefactors are the funds, the banks, because commercial property has increased and therefore their books look better, and NAMA, which is eventually the State. CGT should apply to property regardless of the structure in which it is held. If it is not held in funds, CGT applies to it. We have allowed it not to apply only if it is held in a fund. The €10.6 billion of Irish real estate the Minister of State spoke about is a drop in the ocean regarding the quantum of assets, which are in the trillions regarding the funds. The intention was they would never be used to buy up Irish property. This is what was always envisaged. Therefore, why do we not apply CGT to the uplift in these funds?
If the Minister of State wants them to stay here and have a long-term investment, the five-year rule, if it is to be applied, should kick-off from now. This is typical of the Government. The crisis we have is in terms of renters. Therefore it will introduce this rule because it wants to help renters and the housing crisis. If this is genuine, it would state no CGT would apply if property is held from today on for five years, but this is not what the Government is doing. It is stating that if the property is held for five years, no CGT will apply, which means the fund that came in and bought €1 billion of assets four years ago or four and a half years ago in Dublin can sell in six months time with no CGT applying. This will not help the housing crisis in any way. The Government has moved on this, and I welcome the 20% withholding tax, but the Government needs to move further on CGT. The ratio issue makes no sense. There is no valid reason for a 25% ratio to be applicable. This is easily manageable as it is all computerised. Every part of this is available to fund managers on their systems. They can easily take the dividends from Irish property and segregate them from the rest of the portfolio, as they must do if they have 26% of a holding.
The Deputy is correct to state it was not anticipated we would have this situation. We are now trying to address it through the amendment. In so far as CGT is concerned, this is a policy decision in trying to incentivise the holding of the asset for a longer-term period. This is why it is being introduced for disposal within a five-year period. This policy decision has been taken to try to incentivise longer-term holding and longer-term investment.
In so far as the 25% proportionality test is concerned, there is a main purpose test, so if someone is trying to be creative, as the Deputy outlined, he or she could still be caught under the main purpose provision, so that person would not try to make a property investment play and hide it as something else through the structuring of his or her funds or other investments he or she might make. With regard to why we took 25% and not a different percentage or a lower percentage, it is also about proportionality. Funds will diversify their risk and will have investments in various areas. There will be funds with some investment in Irish property to a much smaller extent. We do not want to do something that might encourage funds to dump a current holding or discourage funds from investing in the future as part of diversification of the portfolio for investors. When we look at what is happening in the country, with regard to the vast majority of the 96 entities, what they control and why they do it, the vast majority will be caught by this provision. Where someone would seek to use our threshold of 25% to step outside of being caught by the provision, there is also the main purpose test for anti-avoidance measures.
I have questions on a shareholder in a fund with IREF assets where the shareholding is more than 10%. I understand the dividend paid out is treated as income from immovable property under any REIT claim for Irish dividend withholding tax paid under a double tax treaty. Will the Minister of State confirm whether this is the case?
For a shareholder in a fund with IREF assets with a shareholding of less than 10%, when the dividend is paid out it is treated as Irish dividend income under any reclaim for tax paid under a double tax treaty. Is this correct?
Obviously, if they own more than 10% of the fund, it is more beneficial to the State because it would be treated as a immovable property and therefore the full 20% will apply and they will have no reclaim for dividend withholding tax. Why are we making a distinction between somebody with more than 10% and somebody with less than 10%?
Ireland has primary taxing rights over property. We have established the principle under the legislation that income arising from an IREF asset should be treated as income from immovable property and subject to the full 20% dividend withholding tax, so that regardless of location there is no way to get out of the 20% withholding tax.
However, if one owns less than 10% of the fund, there is a way of reducing one's liability in respect of the income from that property to the State.
If one is holding less than 10%, then one is essentially blind as to how the fund is investing. Accordingly, one does not have a controlling interest. That is why if one is holding over 10%, one would be liable for the tax and would not be able to write it off against taxes in one's own country.
There is no reason why we do not treat all investors and the income arising from the IREF assets as income from immovable property. The 20% rate is generous. Given the five-year provision, which I do not accept, it is still a generous structure.
In that scenario, the investor has not necessarily made the decision to invest in immovable property. It will only be considered fair, in so far as their investment in the fund is concerned, that they would be able to reduce that to, say, 15% if it was in the US.
Let us take an example whereby the Minister of State owns 11% of the fund and I own 9%. When the dividends are paid out, we each get €1 million. The Minister of State pays to the Irish State 20% or the fund will hold 20% on his behalf. For me, if I were an American, it would be 15%. Regardless of who makes the decision, this will only apply to dividends and income generated from the funds.
This is based on best practice under OECD guidelines. Reciprocal arrangements are in place in terms of that 10% in other countries. That is how this works itself out. The OECD has this point at 10%. Above that, it would be a controlling interest and, therefore, would be taxed differently.
Let us consider the example of REITs. The principle applies because it is the principle of taxation of property in this State. If one takes an American investor, REITs are factored into the double-taxation agreement we have with America. Accordingly, there is no reclaim with REITs because the existing principle is established in terms of property. We have not done this with our other tax treaties.
There is the same reclaim in REITs. My understanding from the officials is that one can do that with a REIT. Where the tax treaty is in place and because the dividend is paid by the REIT or the tax is paid to the State, it can, therefore, be used as a credit against the taxes one paid at home.
It is our treaty as well. I know it is in the middle of renegotiation. It will be interesting to see how the new US Administration will deal with that.
The point I am making is that we have established a practice that income from property can be treated differently. We have primary taxing rights, regardless of where the individual resides. All the other countries have secondary rights. What the Minister for Finance is doing in this section is allowing for a tax leakage from people who really benefited from the system and who will continue to do so. It will be attractive for them to continue to invest here, given that it is a 20% withholding tax but it would only be 15%, for example, in the case of an American investor.
With a REIT, there is a much higher profit distribution threshold. It operates in a different way in terms of the distribution it makes and how often it makes them. What we are doing here is working to the best OECD practice, in so far as making this determination at 10% and what might apply then to that investor versus the person who might be seen to have a more blind or passive investment below 10%.
We are working to OECD best practice on this. The intention is to be consistent with OECD guidance. We have to see what that will mean with our tax treaty with the US. We have to keep our tax treaties in mind and we have to keep in mind the OECD's guidance.
Did the Department, Minister or the Revenue Commissioners take specific advice from the OECD, given that the previous Government worked quite closely with the OECD on these particular changes? Did the OECD have any opinion, or not, as to how effective the changes might be? If it did give an opinion, will the Minister of State make it available? I know this may have been at official rather than ministerial level. Ever since the previous Government took office and since the disaster of the property crash, in terms of tax reputation, Ireland has been increasingly following OECD advice. It is important to know what external advice, if any, was taken on these particular amendments. Whether they are successful will actually depend on what advice was received on them.
In that context, it is certainly apparent that many of the legal and accounting firms, which have an interest in tax planning and management, have given opinions on certain elements of this at various times. Will the Minister of State make available the representations made on a technical basis or by the different institutes and organisations? Advice and suggestions have come from a range of sources. Essentially, they are from people with a strong interest in professional tax planning. Many of them are accountants and quite a lot of them lawyers. There may be others as well.
The amendment is designed to close off an unforeseen loophole. In designing this measure and as a consequence of closing that loophole, has the Minister of State set out a target for tax revenues over the next five to seven years given that it is contingent in certain circumstances on how long properties and assets in some of the funds are held?
The Minister of State referred to 96 funds controlling a significant amount of assets. It would be helpful if he could share with the committee the identities of those funds. All of us would be familiar with different funds, pension funds and so on. It is quite intriguing that the Minister of State referred to 96 particular funds. It may well be that most of them are, to some degree or other, traditional pension funds, many of which have a long association with Ireland. It would be helpful if we knew exactly what we are talking about. Of these funds, how many of them have given rise to the concerns around the avoidance and usage of section 110?
Most of the different kinds of funds that invested in Irish property after the crash have a history of selling on sooner rather than later. In that context, does the Minister of State expect those funds to morph into other funds over the period? In such circumstances, what would be the implications?
The Minister of State referred to a statement by a Minister on rents. Which Minister was he quoting?
I did not hear the name of the person being referenced by the Minister of State.
In regard to the OECD, the officials worked to published guidance from the OECD in regard to how these amendments might best be structured to ensure they achieve their intended purpose. Obviously, the publication of the amendment in September in so far as section 110 is concerned led to a number of representations being made not only on the section 110 issue but on section 122 and what we are trying to do with the IREFs. Some of those representations were made to the Department and others were directed to me. They sought to ensure that, from a technical point of view, no unintended damage was being done to our offering in so far as the funds industry in Ireland is concerned because it is such an important part of our offering. It was important to do that and at the same time ensure we maintained the strong anti-avoidance tax purpose of the amendment. Many of the representations received were very helpful in this regard. This is the reason for the tax changes we have seen over time.
In regard to the five-year target, earlier I read into the record a note on how the officials had arrived at the budget allocation of €50 million for 2017, as provided for in the proposed new section 21 and section 22.
The amount seems very small in the context of the figures we have been talking about. Given that these are Irish assets, the value of which as the Minister of State will be aware, with the recovery, have begun to rise, that particular figure seems very small.
During our discussion on section 21, we had a lengthy discussion on how the amount of €50 million was arrived at. The Department took the view that a conservative figure should be provided for because, as expenditure would be based off the back of it, that was the prudent thing to do. We also discussed ways we could provide more detail around that figure and in regard to sections 21 and 22 prior to Report Stage such that members can have a better understanding of how the €50 million was arrived at in the context of an IREF or a section 110 company.
I read into the record a detailed note from Revenue on how it calculated that figure, including the extrapolations it made in arriving at €50 million and the reason that figure was ultimately included. I did say that it was a conservative figure but it was prudent to be conservative in this regard. If between now and Report Stage we can provide a better understanding of the breakdown between IREFs and section 110 companies into the future, we will do so. As we have moved on from section 21, I do not have the relevant note to hand but I will ensure it is passed on to the Deputy.
In so far as the 96 entities are concerned, the disclosure of the identity of those entities is a matter for the Central Bank.
My understanding is that there are 96 funds holding Irish property assets worth circa €10 billion. That information was provided by the Central Bank. We can request that the Central Bank disclose the identity of the 96 entities concerned. In terms of who we are seeking to capture in the context of section 22, these are players who have built up a large portfolio, the number of which is expected to be less than 96. There will be a change in the timeframe as this amendment takes effect and they become IREFs. There will be a possibility for a second look at this in the future in that, after the amendment has come into effect, we will then know how many companies have registered as IREFs with the Central Bank. We can ask the Central Bank if it can disclose the list of 96. It will be up to the Central Bank what it does in that regard.
In regard to funds moving from short-term to long-term investments, the difficulty is that some of them have debts and they will not able to make the type of change-over. That will not be possible.
On the representations, I presume we can access them via freedom of information, FOI, requests. It would be helpful to the committee if we were to have the representations and the purpose of them. We are talking in technicalities about the potential effectiveness and fairness of the arrangements which have been made. Based on what the Minister of State is saying, there was negotiation, in effect, between the Minister for Finance and the Minister of State, Deputy Eoghan Murphy, the Revenue Commissioners and Department of Finance officials around what would happen. It would be important for us to see those representations such that we can identify their purpose and, ultimately in the context of this, what was given.
On that point, any representation made is available under FOI. I will speak to the Minister, Deputy Noonan, about how those representations might be made available to the committee rather than it having to seek them through the FOI process. I would not characterise what happened as a negotiation from the point at which I was involved. This issue was brought to our attention and it was one we wanted to resolve. In terms of the response, the market provision provided for in the section 21 amendment could in no way be seen as a negotiation. We published the amendment because we wanted advice on whether it would meet what was intended. We had to make a change when it became clear that it did not. In no way was there a negotiation around a possible deal for the industry.
I wish to make two final brief points. Given the difficulties experienced, as previously outlined by the Minister of State, why was the decision made to include charities and credit unions as exempt entities?
We are not introducing any new exemptions by way of these amendments but we are continuing exemptions that already exist, as would be standard practice in so far as a charity might be concerned. There is nothing new being done that would provide for any type of avoidance.
Last year, we had the notorious case of Clerys in Dublin, whereby a property was flipped rapidly from the then owners, at significant profit, to the new owners.
There were strong suggestions some of these mechanisms might have been used and various State organisations have been looking at the matter. Did the Revenue Commissioners look at it? It was a very valuable property. It was not valued in the billions, but it had a value at the time of about €30 million. I am interested because to some extent some of these mechanisms appeared to have been used, even though the values were relatively low compared to some of the funds about which the Minister of State is talking.
Deputy Richard Boyd Barrett is next. We were due to finish at 5 p.m., but will we continue until 5.30 p.m., or do members want to finish? We can suspend the sitting now if that is what they want.
We will be dealing with them later, but we have proposed amendments, apropos some of the discussion we are having, to the effect that if even 1% of an investment is in Irish property, it should be subject to this tax and, we argue, more. The rate of withholding tax should be in the region of 90%, not 20%. The logic behind it is that there has been a really disastrous error on the part of the Government which encouraged speculation in property with the consequences it is belatedly and rather tokenistically trying to address with this amendment. Why should there be tax breaks or exemptions from capital gains tax other than active discouragement of speculation in property? Is the fact that the Government has had to bring forward this amendment not a belated acknowledgment of the disastrous mistake it made? Surely we should be trying to do absolutely everything to turn back the clock, to scotch completely and in every way possible the impact of speculation of a very conscious decision on the part of Government to inflate property values in order to get the banks back into business and NAMA to wash its face. Can the Minister of State tell me if that is the case? Was that the thinking behind it?
I remember when the issue of REITs first came up. I was a member of the finance committee when the various QIAIFs, ICAVs and so on were included in the Finance Bill. As a new Deputy, it was difficult to trawl through this stuff that really only a tax lawyer could understand. Frankly, anyone watching this will not have the foggiest notion what we are talking about. That was the problem in 2013. Were the REITs brought forward in 2013? The ICAVs were brought forward in 2014. In both cases I did not fully understand the details. In the case of the REITs, I was the first and only one to say it because no one even knew what they were. We had spent about ten hours talking about the Finance Bill. That was part of the problem. My head was fried and then the issue of the tax break for REIT's came up. I asked the Minister what they were. I asked: "What the hell is this?" It was a tax break for real estate investment and I cannot remember what the Minister said to justify it at the time. I think he used words to the effect that there would not be much money involved and not much tax would be forgone. I must look back at the transcript to see exactly what he said at the time. The country needs to know how much tax has been forgone as a result. Is there an acknowledgement on the part of Government that the introduction of these measures was an utterly disastrous mistake that led to the unbelievable escalation in property prices and rents and, as a consequence, an unprecedented homelessness crisis? Is the amendment not good enough because it is closing the door after the horse has bolted and when there is actually an opportunity to do something? We should try to grab as much of the profits from thee speculators as we possibly can before they make off with all of the money.
The Chairman did not interrupt anybody else.
On the issue of ICAV, I make the point, though it is rarely a popular one, that we should aim for an investment environment that is somewhat stable. We should have had this provision in place before all the funds were invested in Ireland. Whether it was in 2011 or whenever, we should have had the foresight to have it in place. The ICAV legislation was signed into law as recently as early last year. I make that as an overall point. I support the withholding tax and the taxation of funds in this way. However, I believe we should aim to have a taxation system and investment environment that is stable and consistent, because reputational issues are involved as well. It should have been there years ago. I am not making the point that the legislation should not be enacted - it should - but, it would have been preferable to have had it in law before these decisions were made.
I wish to clarify a few points with the Minister of State. The 20% withholding tax applies to distributions from IREFs. Can the Minister of State clarify for me the nature of these distributions? Are we talking about dividend payments? What are the triggers for the 20% coming into play?
Do the other taxation provisions which exempt the funds from tax generally continue to apply? The withholding tax of 20% is how they would now be taxed. That is the limit of it. Is that correct?
Okay. So it is not like other withholding taxes that apply whereby the funds are held in reserve and offset against the ultimate tax liability that is computed. It does not operate like that, does it?
No, I think the position is clear. It applies to distribution. As long as income such as rental income and so on remains within the fund, there is no tax. It is the distribution or the sale that triggers the actual event.
When the Minister of State was discussing the 25% threshold with Deputy Pearse Doherty earlier, he made the point that it is principally designed to capture the 96 Irish funds that hold approximately €10 billion worth of real estate between them. These funds are now always going to be captured because of that 25% requirement. However, foreign-owned funds can bring a wider breadth of assets into a new structure. They cannot be retrofitted into an existing structure due to the anti-avoidance provision, but new structures that are set up with a lot of foreign assets can come in under the 25% threshold. Does that then put the Irish-owned funds at a disadvantage compared to the foreign-owned funds that can structure their affairs accordingly to remain outside the IREF requirements? Would they be operating, therefore, to a different business model as such? I ask the Minister of State to comment on that.
The Minister of State has acknowledged that the chargeable gain exemption that would apply in respect of assets held for a five-year period is a policy decision. From what I gather from his remarks, the motivation behind it is to encourage funds to hold property for a reasonable period and not to flip the assets in a short period. The argument could be put that five years is a very short period. The Government could require that the assets are held for a longer period. If it believes that the exemption is desirable on the basis of assets being held for a defined period, then why did the Government arrive at a five-year requirement? I ask the Minister of State to comment on that.
One point that the Irish Funds Industry Association, which represents regulated funds, makes about Irish pension schemes and Irish life assurance companies is that if they invest directly in Irish property, they will remain exempt. It makes the point that many of them invest through an Irish-regulated fund and could now be captured by the IREF requirements. I ask the Minister of State to deal with the statement that the Irish Funds Industry Association has made. I imagine that is not the intended effect of the legislation because the Government is providing explicit exemptions to life assurance companies and, indeed, to pension funds as well.
I will speak to the Deputy's final point first. That fear might stem from the original drafting of the amendment, which is not in the final draft. They will not be affected in the way that fear was expressed to the Deputy. It is not the case with the text of the amendment that we are debating today.
The Deputy is absolutely right when it comes to a stable investment environment. That is why, when looking at how best to go about this, the idea of the IREF was landed upon as being an identifiable and distinct thing as far as other funds are concerned. One can now see what it is, what it means to be in it and how one can qualify. That was seen as the best way to do it in order to maintain that stability into the future. Hence, that is also why we have what is basically a new section coming into the Bill, rather than minor amendments being made elsewhere.
It is not clear whether all of the 96 Irish funds that I mentioned will become IREFs. We have 96 Irish funds and there is approximately €10 billion in assets held between them. It might be the case that a smaller number of those funds hold a much more substantial proportion of the €10 billion. It remains to be seen just how many of the 96 end up becoming IREFs.
That will be dependent on the percentage of their holding.
The aim is not to distinguish between what an Irish fund and a foreign fund might be doing in terms of how they operate. It is to make the distinction in so far as Irish property being held by the fund is concerned and what that might mean. I touched upon this earlier. If someone is trying to structure his or her fund in such a way as to avoid the 25% threshold, he or she can be caught in so far as the reasonable-measure tax is concerned. That is there to ensure we will not be susceptible to people restructuring or developing a new structure to sidestep that percentage rule.
It was estimated that five years would be reasonable. It is the introduction of CGT to incentivise holding an asset for longer than five years. A period of five years was seen as an appropriate cut-off for the length of time for which CGT would be applicable. That is how we came to it.
I had more or less concluded. Why were these tax breaks introduced for property investors and speculators in the first place? I still do not understand why it was done. Is there a recognition at this point that it was a mistake? I may have asked this through tabling parliamentary questions, as has Deputy Donnelly. Do we have any idea of how much tax was forgone as a result of the tax breaks in capital gains and in tax on profits and so on that these property investors made since they were introduced? It is criminal if we do not know.
On the 25% threshold, why do we need a threshold? The Minister of State has said that the majority of these property investment entities or vehicles will have more than 25% and so most of them will be captured. Will the Minister of State supply the evidence to back that up? What will be captured? What assets do they have? What proportion of this sector do they represent? What will not be captured? This would give us some sense of what we might be gaining or losing as a consequence of the 25% threshold.
Does the Minister of State have any comment on our view that we should just capture? Given that property values have gone through the roof, should we not try to recoup as much of the increase in value of these property assets that they will walk away with? If they hold on for five years, they could all sell at the end of the five years, which as Deputy Pearse Doherty has suggested, in some cases is now about six months away. They will walk away with 80% of the appreciation in the value of those assets. Why should we let them do that?
It is 100% so there is no capital gains tax. They will walk away with all of the value of that appreciation of Irish property assets that they bought worth billions of euro, and we are going to let them do it. I do not understand the rationale for that. Does the Minister of State not think we should not allow that to happen and rather we should grab it all, or a very big portion of it, and at least apply the normal taxes that would be paid by any other business on the profits and capital gains, if not much higher taxes given what is happening in the property sector and the disastrous situation with the affordability of property?
The Deputy has tabled an amendment on 20% as opposed to 90%. Regarding what we are achieving with the 20%, we need to remember the marginal rate of tax in the 1980s was 65%. The 80% tax introduced that was introduced by the National Asset Management Agency Act 2009 was on windfall gains, not normal gains. We have never had an income tax rate close to the rate suggested in the amendment and as the Deputy put in his comments.
The 20% rate is the standard rate of income tax. It is the rate of dividend withholding tax that applies to distributions by Irish companies and it is the rate of withholding that applies to dividends from real estate investment trusts, REITs. The proposed 20% Irish real estate fund, IREF, withholding tax is a full and final liability. The income cannot be reduced by any expenses or losses and the rate of tax can only be reduced by a double tax treaty where the unit holder is a portfolio investor who holds less than 10% of the units in a fund.
By way of comparison, the equivalent rate in Germany is 26.375%, the UK is 20%, Italy is 26% and Spain is 19%. Therefore a rate of 90% or anywhere near that rate would be completely out of sync with international norms.
The Deputy had a question on the 25% threshold in so far as the 96 funds are concerned. I already had a discussion with Deputy Donnelly on the reasoning for the 25%. That is there to ensure we are capturing those funds whose only business is the play they have made in Irish property or Irish property-backed assets. There is another main purpose test in the legislation. If they are less than 25% but the purpose of the fund's operations is to make that gain, they will be captured under the legislation.
In general, funds are taxed at the level of the investor. They are a means of making collective investments, diversifying risk and perhaps leveraging knowledge in a particular space. It avoids making a blind investment and gives greater investment power than an individual investor would otherwise have. In discussing earlier sections of the Finance Bill we referred to small investments in a start-up operation. Through a fund, they can make a more diverse investment in an area where as individuals they might not have been able to invest previously.
The fund would operate as follows. We have the idea of the fund being able to grow without taxation - a gross roll-up - so the taxation point comes not every time the fund grows but when that profit or income is paid out to the investor. They then pay tax as an investor in Ireland - at 41% for an individual - or in another jurisdiction.
I wish to ask one question on that. I will come back on the generality of the issue later. If one of these funds does not distribute dividends but uses any income it derives on the investment in property, could it then buy more property with that, and because it is not being distributed to the investor, it would not be taxed? As long as the extra income it is generating from rent stays within the vehicle, that money could be used to buy more property and that would not be taxed. Am I right?
Anybody else, who bought a property and gets rent from it pays tax on it. However, these big investment entities can come in, buy lots of property and get extortionate rents, and as long as they do not make a distribution to the investor, they can use the revenue they are generating to buy even more property and jack the rents up even more.
If they hold on to it for five years, at the end of that time they can walk away with all the value of the property. Given the amount of property these vehicles own, that value is probably expanding and expanding.
Most property funds, particularly the property funds we are talking about, are operating with investors who are expecting a nearer-term return, rather than holding on to the assets indefinitely and growing the funds for an indefinite period, because they are very highly leveraged. This is what they are trying to do. The purpose of it is to make a nearer-term redemption than what might be a longer-term fund-----
It is what we are trying to capture with the amendments. They are drafted in this way to make sure we get the withholding tax from these funds. This would not have applied previously. We also want to get capital gains tax from them if they dispose of these funds, or the assets in them, within a five-year period.
My point relates to what happens if they hang on to the fund for five years or for a period beyond five years. Given what is happening with rents at the moment, they must be making a fortune at present. If they are not distributing those moneys, and if they are holding on to the fund without selling it beyond the five-year period, they must be able to use those moneys to buy even more assets. Given what is happening with the inflated value of these assets, they could be using that money to increase and increase the amount of property they own and walk away with all the capital gains. That is a recipe for the complete hoovering up of property, which is what appears to be happening. They are walking away with staggering sums of money. It is just unbelievable.
It is clear that we have differing views. To be honest, the technical sort of answer we are being given is not really getting to the heart of the point. When one looks at this stuff, one sometimes thinks that money is being made out of fresh air for guys who have to pay 20% capital gains tax, or no capital gains tax at all if they hold on to their assets for longer than five years. Where is all this money coming from? I will tell the Minister of State where it is coming from. It is coming from the extortionate rents they are charging. That is where it is coming from. It is coming from the pricing out of the market of vast numbers of our citizens and small businesses that cannot afford these rents. In light of what is happening and what has happened over the past four or five years, I cannot believe we are not realising we have made a big mistake here. We need to grab as much of it as we can back to undo some of the damage we have caused. We need to close down all the speculation in property we have incentivised through these structures, with disastrous consequences for the property and housing sector. That is my view. That is why we are trying in a limited way with these amendments to shut this thing down and grab as much as possible. Does the Minister of State not see any value in what I am saying here?
I think I understand the point of view from which the Deputy is approaching this matter. We have to be careful to strike a balance when we are moving to address the leaking of tax out of the Irish State, or the Irish Exchequer, as a result of the operation of a few funds. We are probably talking about approximately 1% of all funds being administratively managed through the Irish State. When we are making sure this tax leakage no longer occurs and taxes are paid, we must ensure we are not doing anything to damage the operation of the funds industry, given how important this aspect of our international financial services offering is, or to damage investment in Ireland more generally. People need to know they are investing in a stable and transparent environment. As a small island economy, we depend on the movement of international capital flows into this country for investment in things like development, construction and small and medium-sized enterprises. We are seeking to find and strike that balance in this amendment.
I put it to the Minister of State that we are not finding that balance. We have really messed up in the area of property. I put it to the Minister of State that this tokenistic measure will not undo the damage that has been done. Obviously, we disagree on this issue. I would like to ask a couple of questions about other issues.
I might follow up on Deputy Boyd Barrett's point about the rolling-off of profits before we move on to other issues. As the Deputy mentioned, some fund structures that are making annual recurring profits on the back of rental income are not distributing those profits and are therefore not paying any tax. Is there any restriction on the use of recurring annual profits from rental income to reinvest on the capital side in property? The ultimate reason for the strategy of converting all of the annual gain into a capital gain is to make an entirely tax-free exit. Is there any restriction on that?
I can get a proper note on this in advance of Report Stage, but my understanding is that one would not be able to convert retained profits into a new capital investment because that would be seen as a gain that might be liable to tax.
On this specific point, when the new vehicles were brought in my understanding was that the whole point of them was to enable this to be done. The intention was to attract foreign or domestic investment capital into property and to provide for no tax to be charged in this regard for several years. We wanted the money. My understanding was that the whole point of these vehicles, rightly or wrongly, was to recycle the profits into further investments, as Deputy Michael McGrath has explained. That is actually what they have tried to do. This has led to a property bubble. My understanding is that this was the exact objective.
As I have said, it is shocking if this is what is going on. I suspect that it is. I have another couple of questions. The withholding tax does not apply to certain other collective investment undertakings. The Minister of State has mentioned life assurance and pension funds, etc., in this context. Can he tell us what other collective investment undertakings this tax does not apply to?
The IREF regime will not apply to certain categories of investment funds that fall within the definition of "investment undertakings" in section 739B. The first of these is a unit trust scheme that is or is deemed to be a currently authorised unit trust scheme under the Unit Trusts Act 1990 but not special investment schemes as defined in section 737 or exempt unit trusts as defined in section 731(5)(a). Exempt unit trusts do not come within the terms of the new regime because they are not authorised and are not deemed to be authorised. However, an exempt unit trust will come within the terms of the regime if it becomes authorised. Other investment undertakings include undertakings for collective investment in transferable securities authorised under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 1989, certain authorised investment companies within the meaning of Part XIII of the Companies Act 1990, authorised Irish collective asset-management vehicles within the meaning of the Irish Collective Asset Management Vehicle Act 2015, investment limited partnerships within the meaning of the Investment Limited Partnership Act 1994 that were authorised before 13 February 2013 and certain wholly owned companies of an investment undertaking categorised above.
That does not mean there is an exemption for all of them. There is a last man standing principle here. If there is a transfer between investment undertakings, the final transfer is when the tax is applied. I think the officials went through this in some detail at the technical briefing. If there is a transfer between investment undertakings, withholding tax will not be applied, but when the final investment undertaking occurs, an IREF taxable event withholding tax is then applied. That is the last man standing principle. That is where the point of taxation is.
Any of the entities referred to by the Minister of State could have an interest in property. I am trying to understand this. Entities might be investing in property, but the unit trusts or those bodies in the lists referred to by the Minister of State are not subject to withholding tax. Is that correct?
That is what the Minister of State is talking about, but I am asking which categories are not liable for withholding tax. The Minister of State has listed them. Is that correct?
Any transfer that might occur between two of the entities, as I listed them, which would be deemed to have come under an IREF taxable event would take place at the last point of the investment being transferred and when the distribution is made.
Why is there an exception? I do not understand it. Why does the Minister of State's note indicate that it will not apply to them? The note in the explanatory memorandum states: "The withholding tax will not apply to certain categories of investors such as pension funds, life assurance companies and other collective investment undertakings." What are these other collective investment undertakings? I think the Minister of State has just listed them. I want to know why withholding tax does not apply to them.
The concern in drafting the amendment is that people might try to structure the relationship between funds or different investment vehicles in such a way as was as to avoid having to pay the withholding tax at the appropriate point. This measure serves to ensure, in so far as the list I read out is concerned, that any transfer between entities in that way or where there might be a parent or a company above or below the IREF, would not avoid the IREF chargeable event.
I think I understand, but I am not entirely sure of it. I understand that the amendment refers to any entity that has 25% invested or that could be deemed to be in some way related to property. If that is the case, then the withholding tax applies. Then, we have another category to which, we are told, unless I have misunderstood what is being said, withholding tax does not apply. What the Minister of State seems to be saying is that if there were any chicanery from the IREF, as defined in the amendment, whereby it attempted to transfer to another entity, then it would be caught. Is that what the Minister of State is saying? I am asking something different. I am asking about the exempt categories.
It is easy to get lost in the detail and to move away from the intention of the provision as per the amendment as drafted. The purpose is to ensure that an entity could not avoid the IREF taxable event by moving something between funds. For example, let us suppose someone tried to be clever and put a pension fund above an IREF to avoid payment because the pension fund was not liable to withholding tax. They would be unable to do that. That is the intent.
I have a simple question. Does a unit trust that has interest in property pay the tax? The Minister of State listed unit trusts among the examples. Are they going to pay withholding tax?
I think I have made all my points but I have one last question which is more generally on withholding tax on things other than property. Are there other areas in financial services generally where we should be imposing withholding tax or where similar situations could arise? We have discovered how some entities ended up paying no tax at all. Now, this has been identified in the area of property that they were paying no tax. Should the principle of withholding tax apply to all investment in financial services regardless of whether they relate to property or anything else or where there is a possibility that no tax is being paid?
We are looking at this because the State retains taxing rights on Irish property. That is why we saw a tax leakage and we moved to correct it through the amendments.
I cannot see how another fund might be operating in a way. We retain taxing rights on trading activity within the State and Irish-sourced income. I cannot foresee how a fund would be operating and investing in Ireland in such a way that we could claim taxing rights other that the three areas to which I have referred.
A fund is used as a bridge between the investor and the investment; therefore, generally, tax is paid at the level of the investor when the investment is returned through a dividend or a distribution. An individual pays at the rate of 41%, a passive investor in a company at 25% and a corporation at 12.5%. That is how it is treated internationally. I do not see, therefore, how we could operate differently, other than the fact that we found this tax leakage in the property market and are moving to address it in the amendment.
I want to establish a baseline on which we would all work and will use an example to make it real because there is a lot of abstract stuff and acronyms. Let us somebody pays €10 million for a hotel and runs it for ten years, he or she has a trading profit of €1 million each year and then sells the hotel for €20 million. In other words, he or she has a total of €10 million in profits and a capital gain of further €10 million, giving a profit total of €20 million. In 2010 that is what would have been done by a property or a hotel company. The trading profits would be taxed at a 12.5% corporation tax rate, while capital gains tax would be applied to the €10 million capital gain from the sale of the hotel. The annual payments to the owners or shareholders of the company would have withholding tax applied, while the shareholders would pay income tax on the remaining profits, with a tax credit applied to the dividend withholding tax. That is how it works for anyone who runs a normal company such as a factory, but in the last Dáil new property funds came into existence, the collective asset management vehicles known as ICAVs and REITs. QIFs had been in existence, but they were not typically used for property investments. Instead of a person buying a hotel, he or she created a fund of €10 million to buy a hotel. Rather than being a company that owned a hotel, it was owned by a fund; therefore, no corporation tax and no capital gains tax was paid. For many, no withholding tax was paid. That is what we are addressing, but income tax was paid. Therefore, if the company was domiciled in Ireland and did not pretend to live in Portugal-----
-----it paid income tax. If, however, it was non-resident, no corporation tax, capital gains tax or withholding tax was paid and the company might or might not have been paying income tax in its own country.
The amendment changes the names of the funds and calls them real estate funds, but there will still be no corporation tax and no capital gains tax paid. However, there will now be a 20% withholding tax. An Irish resident will pay income tax on whatever money he or she gets from the hotel company, now called an IREF, but will be given a tax credit for the withholding tax. The only tax that will be paid in the operation of the hotel is the income tax of the shareholder, the owner of the fund. The amendment applies the 20% withholding tax to somebody who lives or pretends to live abroad to make sure we get something. In the context of what is happening in the property market, it is reasonable to say that, while a lot of people pay no tax, this measure will capture some tax, but a few years ago, before the ICAVs and REITs were introduced, trading tax was paid - it will not now be paid - while capital gains tax was paid by the company when it sold the hotel. That will not now be paid either. Withholding tax and income tax were and will continue to be paid.
This happened because, from 2011 to 2013, people in government, the Department and the Central Bank decided we needed to attract foreign capital into the property market in Ireland. The Government created completely tax-free vehicles to do this and, lo and behold, money poured into the country. We now have a property bubble, meaning that too much money has poured into the country. High-quality office space in Dublin is selling for 6.4 times what it costs to build when, at the height of the bubble in 2007, it sold for approximately six times more. A property ownership business with profits from running hotels, commercial office space and apartments with rent rolls was treated in the same way as other companies in that it paid corporation tax and capital gains tax, while withholding tax was applied, with income tax being paid on dividends. The Government made it tax free and money poured into the country, creating a property bubble that is very dangerous. The Government has rolled it back somewhat and suggested it was never intended to be tax free. It is, however, tax free; Irish residents are pretending to live abroad and paying no taxes, while foreign investors who are genuinely living abroad are also paying no taxes. Accordingly, it has been decided that we need to apply some tax. If we compare the IREF world - the measure will be voted through today - with the world in 2010, we have essentially lifted the entire property sector out of the capital gains tax net for wealthy investors - not mom and pop who want to buy a one-bedroom apartment as part of their pension fund but who will still be hit with capital gains tax. The sector is a massive asset base in the country.
The legislation states everybody is exempt from capital gains tax and if a firm is a pension fund, a life assurance fund, a credit union, a charity or one of the investment undertakings, it is exempt from withholding tax. The majority of commercial property investments in this country are made by pension and life assurance funds which will not pay capital gain tax or withholding tax. The amendment states a specified person - the person who is taxed - will not include an "investment undertaking". This covers REITs, ICAVs and all of the companies mentioned. Measuring the impact of the amendment against the position today, one can say that at least it applies a 20% withholding tax in areas where it is currently not being applied, but measuring it against the position five years ago, it will leave a vast swathe of Irish investment properties outside the tax net.
Let us take for example an hotel that is bought for €10 million, provides €10 million in trading profits and is sold for €10 million profit. There is €10 million in capital gains profits and €10 million in trading profits. Am I right in thinking that if a pension fund buys that hotel, no tax would be applied whatsoever, including withholding tax?
Yes, but, what if it is a company? There is a concept that taxing the company and then taxing the shareholder is somehow a double taxation. It is not double taxation. It is completely normal taxation. Companies are taxed, they pay profits to the shareholders and those shareholders are then taxed. Is this right? I would like to run through all of this. I accept that pension holders, when they get their payout, are taxed and it is taxable income. Am I right in thinking that if a pension fund buys the hotel, there would be no tax paid?
What about credit unions? The pension and assurance fund companies were not treated the same ten years ago. Life assurance funds paid their taxes then and they do not now, and this is the danger of marking everything to today. So, pension funds will not pay any taxes? Life assurance funds will not pay any taxes.
Absolutely, I accept that they were not, but life assurance funds did pay taxes. They may not have paid tax on the funds they were investing on behalf of their policyholders, but life assurance funds have their own capital which buys the hotels and the properties and so on.
Life assurance funds have two pots of money. One pot of money is their own money; for example, if a person takes out a life assurance policy and pays a €3,000 premium per year into the fund, on one's death one's spouse receives €200,000. The premium that is paid in every year to that fund is owned by the life assurance fund. The second pot of money is approved retirement funds, ARFs. It is the pot that says "I am putting money into the life assurance fund but it is my money and the company will invest it on my behalf, I will draw it down when I retire and then I will pay tax on that". The pot of money that belongs to the life assurance fund was, until recently, taxed.
Amendment No. 100 says that capital gains tax will not be paid by anybody once it is held for five years. On exclusions from the withholding tax - exclusions from being a specified person - the amendment cites pension funds, investment undertakings, life businesses, credit unions, qualifying companies, section 110 organisations and so forth. I want to walk through this, rather than getting caught in the acronyms. Pension funds that do not pay tax bills will continue to pay no tax and that is fine. Life assurance companies do pay tax, or at least until a few years ago they did pay tax. Is there any situation in which a life assurance company will be taxed on profits from property?
There will be no withholding tax in that scenario for a life assurance company but as they move the profits into the company they would pay corporation tax on that. Chapter 5 of Part 26 of the Taxes Consolidation Act 1997, deals with the taxation of the investment return on life assurance policies and policies in respect of capital redemption businesses, in so far as they are new basis business. With investment in such life policies allowed to grow without the imposition of tax, tax is due only on the happening of a chargeable event. The exit tax must be deducted on the happening of a chargeable event. That event happens on the maturity of the life policy, including when payments were made on death or disability which payments result in the termination of a life policy, on the surrender in whole or in part of the rights conferred by the life policy, including where payments are made on death or disability which payments do not result in the termination of the life policy, and on the assignment, in whole or in part, of the life policy on the ending of an eight-year period beginning with the inception of the life policy, and each subsequent eight-year period beginning when the previous one ends. The amount of exit tax to be deducted is calculated by applying a rate of tax on the gain arising on a chargeable event. There are rules for calculating the amount of the gain. The taxable gain arising on a chargeable event is the policy proceeds, less the premium paid, in the event of maturity, close or surrender of the policy. I could supply this note to the Deputy but it is quite detailed and lengthy. That is my understanding of the scenario.
Will the Minister of State clarify, with regard to life insurance funds, that in this new world it is the not the policyholder on draw-down but the life assurance company itself that will pay taxes on profits from property?
The Deputy made two points about life assurance fund companies and the movements between them. The fund which is the policyholders' life assurance side of the business, will be able to roll up as per the roll-up regime in that fund and grow the fund in that way. There would be a different treatment for the shareholders, which is a separate part of the life insurance fund. It would be treated differently.
Let us say it was a normal company. The profits would be taxed, the post-tax profits would be distributed and those distributions would then be taxed. Pension funds are different in that their profits are not taxed; they are distributed and then the policyholder is taxed but I am trying to establish the difference for the life assurance fund. A life assurance fund is different. First of all it has shareholders, which pension funds do not. A life assurance fund pays dividends to its shareholders. I am trying to establish - maybe we have agreement or perhaps not - that-----
I do not want to get lost in the weeds about the tax between life assurance fund companies but it is important that we clarify what this amendment would do. There would not be a change as for life assurance funds and the way their tax position is treated.
I fully support the policy intent, which is to apply withholding tax in circumstances where it should be applied but where it is either not being applied or being avoided at present. However, if one compares the new IREF world into which we are moving to that which existed in 2010, it would appear that a vast swathe of property investment is going to move largely outside the tax net. We all agree that anything in which pension funds invest is tax-free. Some of what life insurance companies invest in is tax-free. The reason this is important is because these funds are the majority purchasers of investment property in Ireland. The Minister of State referenced a tax avoidance issue at which the Department is looking and said that it applies to approximately 1% of the funds. This means that 1% of the funds are trying to do something they should not be doing and the Department is shutting them down, which is fine. When it comes to property investment, however, the pension funds and the life funds are the main investors, so we are taking this huge asset base and basically making it tax-free. That is my concern.
The third matter concerns investment undertakings. As I read the legislation - and I think there might be an answer to this - it appears to exclude the investment undertakings from withholding tax. It definitely excludes them from capital gains tax. Basically, no capital gains tax will be paid on Irish property anymore. The individual - the mom and pop who buy a one-bedroom apartment - will continue to pay it but once one reaches a reasonably small threshold, one will not have to pay capital gains tax anymore. This is a massive policy change. There seems to be a very serious exemption for pension funds and life insurance and the investment undertakings appear to be exempt from withholding tax. Is that the Minister of State's understanding of what the IREF does?
I reiterate that it was not anticipated that funds would be operating in this way or to this extent, hence the reason why we are making the amendment to section 22. REITs have existed for some time. Their involvement in the Irish property market is newer but they have existed in the US since the 1960s or 1970s. ICAVs are new but QIAIFs were in existence before them.
In respect of withholding tax, the purpose of the amendment is to capture the non-resident through the amendment who was not previously being captured. In the context of the introduction of capital gains tax, I reiterate that the intention is not so far from trying to make sure assets are held on to for a reasonable period. It is possible that some funds will not continue as funds as a result of this legislative change. It is possible that some funds will opt to step into a trading entity - a corporation. That is a possible outcome of this legislation that will need to be looked at a later date.
In respect of investment undertakings, the Deputy mentioned section 13(2)(b) on page 23. To clarify, that does not apply to REITs.
It does not apply to REITs. We are working to the OECD standard in terms of how all of this should be treated. When we talked about investment undertakings, that is the point we discussed with Deputy Boyd Barrett. It is not an attempt to make sure that withholding tax will not be liable, we are just ensuring that it is taxed at the appropriate point in so far as the last-man-standing principle is concerned.
In respect of Deputy Donnelly's more general point, I would not regard this as a policy change. It is a policy change in this instance in the context of how we are trying to treat the operation of funds when it comes to property and property-based assets. That is a policy change in terms of introducing this withholding tax because the funds have been used in a way that was not anticipated and there is tax leakage from the Irish State. However, I do not see it as a policy change to take property out of the levying of capital gains tax. That is the intention behind introducing capital gains tax on this fund for the first time. The idea is - and it is a policy decision - that certain funds and investments would be held longer than they were originally intended to be held so that there would be a proper investment. Deputy Donnelly made a comparison in respect of an individual who is buying a property or an apartment. One of the benefits of the fund regime in terms of how it operates is the scale on which a fund can invest and make the type of investment in developments that are needed in an economy. It does not just happen in property but, of course, that is the area to which we are speaking.
I accept that but, essentially, what we are clarifying in law is that there are two different tax regimes. There is one for the ordinary citizen who buys a one-bedroom apartment because he or she pays USC, PRSI and income tax on the rent and full capital gains tax on the sale - if there are any gains.
Then there is a separate tax regime for rich people who can afford the lawyers to put their property assets into funds because they will pay no USC, no PRSI and no capital gains tax although they will pay income tax. At the risk of sounding like my learned colleague, there is, as far as I can see, one law for the rich and one law for everyone else. The average citizen is hit with numerous taxes that fund funds, which is basically how rich people invest and buy property, but the funds are exempt from most of those taxes.
I do not want to start using terms such as the rich man and the poor man. There are products available to individuals - this is one of the benefits of funds - that allow people to invest in an area in which they might not have the necessary expertise but the person managing the fund does. There are ways in which a person can invest in a product that they might not previously have been able to. The money is all clubbed together through a collective investment, which means they can now invest in something that they would not have been able to afford previously and they might get a better yield as a result.
This is not, as people might think, just about someone who is incredibly wealthy taking great advantage of a mismatch in tax laws for an individual and for a fund or trading entity. Different mechanisms have been specifically built in order that an investor who might not be as qualified can make those types of investments. There are also entities such as the qualifying investor alternative investment fund, QIAIF, which is for a qualified investor. Those funds have different sets of regulations in terms of the protection of the investor because the investor is seen to have a level of expertise.
If an individual invests in a property, there are different reliefs that they can avail of in terms of their investment in the property depending on, for instance, the purpose of the property. If they are investing in a property as a business, which they might be individually, there are even further ones available.
Not really. There are the normal tax deductions, which are business costs. As an analogy, we are applying what we are doing in property to non-property. If a person has the money to open a launderette, café, popcorn stand or sweetshop, he will pay corporation tax on any profits. If he incurs any capital gains, he will pay full capital gains tax, withholding tax will be applied to any post-tax profits and he will incur income tax. That is how it works today. However, if a person opens a really big company, none of those rules apply. We will not charge corporation tax or capital gains tax, although we will charge a withholding tax. That is what this is saying. It is saying that if a person can buy one apartment or open a sweetshop, all the taxes apply. However, if a person is richer than that and able to open a big company or buy 20 apartments, only one of those taxes applies. That is essentially what this is doing.
If people are less wealthy or not rich or however one might want to term it, they can come together and pool their investment money to make an investment in areas where they might not have been able to do so previously. That is the purpose of a fund. If they make a profit, they are charged at the marginal rate.
Sure, it can be done through a pension fund, but nonetheless we are now embedding in law a situation that states that a small property investor will pay a range of taxes but a big property investor will not. That is what this is doing. It is just like saying that if a person can open a sweetshop he will pay a range of taxes, but if he can open a €20 million company he will not. Does that seem reasonable?
I appreciate that and I have no problem with the logic, which is taking the current situation and saying it will make it a bit better. However, the current situation is the result of the past five or six years of massive tax breaks on property. We can see what has happened. We know that the property investors were approached, told that these new vehicles that are tax free have been created and asked to invest in Irish property, and they did. The tax breaks were real. We know that. Money has poured in and we now have a property bubble. Perhaps it was the right thing to do four or five years ago, although I do not think it was, but in doing that and now locking most of it in, we are taking a massive section of our investment property base out of the tax net. The Minister of State should, obviously, feel free to respond. I do not think I need to make the point again and I do not think it will be changed in this amendment. A report examining how investment property was taxed ten years ago, how it is being taxed today and how it will be taxed in the new world would be very useful. My suspicion is that we will see an improvement in the IREF world in terms of today, but a serious disimprovement in terms of five or ten years ago when property companies paid normal taxes.
Deputy Donnelly is talking about a company, but what we are talking about is funds. Some of the things he points to in his remarks are perhaps pointing at a more significant or fundamental approach to funds and how they invest versus the purpose of a fund or some of things we try to achieve in allowing funds to be established, such as removing that layer of double taxation, versus the individual or a group of individuals investing in a popcorn stand. They are not being taxed twice because they invested as part of a group. The benefits that come from that either in terms of leveraging it include risk diversification, investor knowledge or the larger investment pool to make a more substantial investment. On the point Deputy Donnelly is making about there perhaps having been a change in how property was treated from a taxation point of view because of what funds began to do and what we are now trying to capture-----
Let me make two quick points. First, that a company pays tax and then the individual shareholders pay income tax on the post-tax profits is not double taxation. That happens in every company around the world. The company pays its corporation tax and whatever else as well as the shareholders and the shareholders pay tax. Double taxation occurs when, for example, a company invests in a supermarket in France, the French Government applies taxes to its profits, it brings the profits home and the same taxes are applied here in Ireland.
That is a form of double taxation, but another form of double taxation would be if one were to levy a tax on the fund and the individual who invested in the ice cream shop through the fund was being both taxed at the level of the fund and at the level of their distribution, which would be their marginal rate of tax. If they had invested directly into the ice cream fund, they would only have been taxed on the distribution, which would be at the marginal rate. The second layer comes in there because they made a collective investment. The purpose of the fund is to ensure they are not subject to double taxation for investing collectively given the benefits that come from collective investment.
That is not what is going on in the property market. The funds directly own the property. It is not as if a fund owns the ice cream shop, the ice cream shop is taxed, the fund is then taxed and then the shareholders are taxed. That would be double taxation, but that is not what is happening. It is not as if the funds own property companies that are paying tax and we are saying that the property companies pay tax so we are not going to tax twice the funds that own the property companies. If that were the case, I would agree with the Minister of State, but that is not how this works. The property investment funds own the property. They get direct income. It is their business or trading income. What we are saying is that we are not going to tax their trading income, but we will tax their dividend payments. If we were to tax the trading income and tax the dividend payments, that is not double taxation. That is how every business works. However, here, we are saying that we are not going to tax the trading income. For some reason, in property we are not going to do that. It is unlike any other sector. We are no longer taxing their trading income, just their dividend payments.
This is the section 110 companies which are not allowed to own the property and can only own the loan. They too get direct income from the loans in the interest and capital payments. We will leave it at that. It would be very useful to get a report from the Department looking at the evolution of property tax in Ireland over the last ten years because I believe it would show the following. In spite of the good efforts in the amendment, over a ten-year rather than a one-year view, we have lifted a large chunk of a really important taxable asset out of the tax base. The Minister of State might bring that back to the Minister, Deputy Noonan, and see if he would consider it. I thank the Minister of State and the Chair for their time.
But it will not be rental income, it will be trade income. It is only if the private nursing home is rented out to another operator who operates the facility. What is the position with private health care facilities?
A fund would not be allowed to operate a health care facility and it might therefore have engaged someone else to do that. If the Deputy is talking about a specific case, I would need to see the details.
Obviously, someone else would operate the private health care facility. Therefore, will that part of the fund's portfolio which includes a number of private health care buildings or facilities be deemed IREF assets?
Okay. I thank the Minister of State. I turn to the dividend withholding tax. What is being proposed is a 20% withholding tax for foreign investors on dividends and that relates only to IREF assets. As such, we are only talking about property. I want to talk about foreign investors with shares in Irish registered companies. I refer to the hypothetical situation in which they are held by a fund, for example in Siteserv, a company that has often been referred to in the House, through an ICAV and where dividends are paid out to a non-Irish resident investor in that ICAV. How will those dividends be taxed?
What if it was not held in an ICAV but was held in a company? For example, what if Siteserv or any company simply paid out dividends to the investor? What if Siteserv was paying out dividends to an investor - an owner - in the USA? If it was paying dividends out directly, where would they be taxed?
Yes. We are talking about a company paying out dividends to a shareholder. It is not going through an ICAV and is just coming directly from the company and the shareholder is non-Irish resident. How are those dividends taxed?
There is no dividend withholding tax. Investors will pay tax in their home country depending on the treaty arrangements in place. They will not pay a dividend withholding tax, they will pay at the investor level in their home jurisdiction.
As such, there is no tax. The point I am trying to make flows from what Deputy Donnelly was raising earlier. A non-Irish investor investing in a company here and receiving dividends pays no tax at all in relation to that investment.
This is the inequity here. We have seen this. While the current legislation would not allow it to happen the same way, this has happened in terms of the ICAV which has brought much of this to public attention. That is the one Denis O'Brien was operating. Wealthy individuals with the resources can set up an ICAV and transfer their properties to it, leave it there for five years, look at the massive uplift in relation to property value and get away without paying 33% capital gains tax on the assets. These funds are not supposed to be designed for an individual and his partner or a family, they are supposed to be about a number of large investors sharing dividends. There is an abuse here and unless the Government sets a minimum number of investors in order to establish an ICAV, it will continue. People will continue to structure their property into these vehicles to avail of the CGT exemption and other reductions in taxation that result from this.
I see what the Deputy is getting at in terms of a potential avoidance and we can reflect on that. I will speak to the Minister, Deputy Noonan, about a potential additional measure that might address that on Report Stage.
I oppose this section on the basis that the Government is allowing the capital gains tax, CGT, loophole to remain. I know that the Minister is not going to back down on the issue and cannot imagine that we have the numbers to force a change. However, I ask the Minister of State to at least reflect on the point that this should only happen from the date of enactment of the legislation. I suggest that if a property is held for five years from the day of passage of the legislation, rather than backdating to when the owners came to the country, it be CGT-exempt.
I have spoken to the Minister about mortgage interest relief on a loan taken out prior to the end of 2012 to self-build on a portion of land. I ask the Minister of State to consider that there are a small number of people who are caught in that predicament and on Report Stage to consider providing for mortgage interest relief. I raise this issue on behalf of Deputy John Paul Phelan who has spoken to the Minister about it.
I move amendment No. 106:
In page 42, between lines 12 and 13, to insert the following: "23.The Minister shall, within nine months from the passing of this Act, prepare and lay before Dáil Éireann a report on the ability of non-resident investors who hold Irish business assets (including shares in Irish businesses) in QIAIFs and ICAVs, to avoid dividend withholding tax on any dividends they receive related to their Irish business holdings.".
The principle of this amendment is the same as for the previous one. We discussed the timeframe in regard to section 110 companies. The intention is the same, namely, we would have a report on "the ability of non-resident investors who hold Irish business assets (including shares in Irish businesses) in QIAIFs and ICAVs, to avoid dividend withholding tax on any dividends they receive related to their Irish business holdings". I was talking to the Minister of State's officials earlier about whether dividend withholding tax is being applied to non-resident investors who hold Irish business assets in ICAVs. I refer to holding the shares of a company and then paying out dividends from the profits on those shares and to whether the non-resident investor can avoid paying dividend withholding tax.
With regard to the proposal that the Minister prepare within nine months a report on the subject matter outlined in the amendment, in 2010 the OECD published a report on the taxation of collective investment vehicles, or funds as they are more commonly referred to, which stressed the importance of tax neutrality for investments made through funds. As the investor will pay tax on any income received from the fund, any taxation at the fund level itself would result in double taxation. Without tax neutrality, the benefits of investing through a fund would be outweighed by the double taxation that would arise.
Most OECD countries now have a tax system that provides for neutrality between direct investments and investments through a fund.
The normal tax treatment afforded to Irish collective investment funds is that the funds invested are allowed to grow on a tax-free basis within the fund. The income is taxed at the level of the investor rather than the fund, which, as I have outlined, is standard international practice.
To ensure that the appropriate tax is collected from Irish investors, funds are obliged to operate an exit tax regime and remit the tax deducted in this manner to the Revenue Commissioners. This charge to tax does not apply in the case of unit holders who are non-resident. In the case of non-resident investors, their liability to tax on gains from the fund will be determined in their home jurisdiction.
There is a recognition worldwide of the benefits that collective investment vehicles provide to facilitate smaller investors in planning for retirement. In its 2010 report, the OECD noted that governments have long recognised the importance of funds as a complement to other savings vehicles in terms of facilitating retirement security. In many countries, participants in defined contribution retirement plans invest primarily in funds. Since funds allow small investments, they are ideally suited for such periodic savings plans. They are highly liquid, allowing withdrawals as needed by retirees. With ageing populations in many countries, funds will become increasingly important.
The OECD report notes that a small investor who buys interests in funds can instantly achieve the benefits of diversification that otherwise would require much greater investment. Funds also allow small investors to gain the benefits of economies of scale even if they have relatively little invested. In addition, investors in funds benefit from the market experience and insights of professional money managers. We addressed that in discussing the previous two sections.
It is important to note that Ireland has extensive protections under our tax code to prevent tax avoidance. These are strengthened on a regular basis to keep pace with any new threats to the tax base identified by the Revenue Commissioners or otherwise. Where tax avoidance schemes or abuse of the tax regime are identified by the Revenue Commissioners and brought to the Department’s attention, any proposals will be considered by the Minister for Finance in the context of the Finance Bill.
However, as has been outlined, the use of fund vehicles is not using a loophole or a tax break. They are simply a method of facilitating collective investment. Therefore, it is not proposed to accept the amendment.
I move amendment No. 113:
In page 46, between lines 31 and 32, to insert the following: "25.The Minister shall, within six months from the passing of this Act, prepare and lay before Dáil Éireann a report on the role and sustainability of Corporation Tax receipts as an element of the tax collected within the State.".
This amendment relates to corporation tax. We need to start considering the sustainability of corporation tax receipts. I have referred on the record on a number of occasions to the vulnerability of our corporation tax receipts.
I hope that they will be sustained, but two issues arise. There has been a large increase in corporation tax receipts, but there has also been a concentration in those, with 40% of them paid by just ten companies in 2015. In 2009, the figure was 21 companies. This raises a question of vulnerability. International factors are outside of our control, but we need to start considering how to deal with our bumper corporation tax receipts of recent years compared with previous years. In 2015, corporation tax paid by the top ten companies amounted to 6% of our overall Exchequer tax revenue. That is the same amount that the State was accruing in stamp duty in 2007. There has been a great deal of discussion about stamp duty being relied on at that time and inappropriate fiscal decisions being made as a result of stamp duty and other property-related taxes, but stamp duty in 2007 amounted to the same as ten companies' corporation tax payments in 2015. I want every company that is in Ireland staying here. I want their taxes to continue being paid in Ireland. From the State's perspective, changes for the better have been made to corporation tax, but it is highly mobile and changes can be easily reversed. When there is such a concentration, there are vulnerabilities.
We must be calm and measured. When people start debating corporation tax, we sometimes seem to get very excited. Many people have different opinions on whether the rate should increase or decrease. For the majority of Members in the Houses, however, there is a settled view on corporation tax rates. There may be issues around the margins, albeit substantial ones, but the question is not on the tax itself or our offering, but on how we should deal with it and plan for the future. If we had a time chamber and went back to 2007, we would be sitting around this table and saying that we should not be basing our public finances on stamp duty. I am not saying that the public finances should not be planned on the basis of corporation tax. There will always be a level of corporation tax in the overall tax take. For example, ours is approximately 15% compared with the EU average of 10%. However, when ten companies pay 6% of the overall tax take, it raises an issue. It is imprudent to plan for the future on that basis. It accounts for a large amount of our tax take and there is a high concentration following a significant increase in recent years. I presume that the concentration will only intensify as the years go by. Therefore, we need to consider this matter in a prudent and fiscally responsible way.
To start that discussion, and perhaps using the budgetary committee, the Department should report on changes in corporation tax, the level of concentration and what can be done, if anything. For example, should we plan for the future on the basis of those corporation tax receipts or should we be more prudent and, although we are taking in a certain amount now, leave some aside from a fiscal planning point of view because of a possible vulnerability? I am not arguing that we should do the latter, but there must be a discussion on the concentration in those receipts.
In 2015, the receipts from corporation tax were just under €6.9 billion. This equated to approximately 15% of the overall Exchequer tax receipts, which is in line with OECD averages. However, the final figure reflected a substantial increase on what had been forecast and on the prior year's amount.
In order to get a better understanding of the increase in corporation tax receipts, earlier this year the Revenue Commissioners analysed tax return and payment data for 2014 and 2015. Although most of the tax returns for 2015 are only being filed now, Revenue examined the payments data to see if there were indications of trends. The Revenue analysis of the increase in corporation tax receipts showed that the main factor driving the increased receipts in 2015 was likely to be profitability.
In line with most small open economies, corporation tax receipts in Ireland are highly concentrated, with a high proportion of receipts coming from the multinational sector. The Revenue Commissioners have advised that approximately half of the increase in corporation tax receipts in 2015 came from a small number of large multinationals.
Although corporation tax is concentrated in the multinationals sector, it is fair to say that the basis for the additional corporation tax being paid was relatively broad based with improved receipts across a number of different sectors and sized firms, including indigenous ones. This was also evidenced in the Revenue report, which showed that payments from indigenous companies were growing at a similar rate to the payments from multinationals, albeit at lower monetary levels.
For 2016, the Department has forecast that corporation tax receipts will come in at approximately €7.5 billion, which represents approximately 15% of Exchequer tax revenue. For 2017, modest growth of 2.7% is forecast, which would bring the receipts to just over €7.7 billion. It is clear, therefore, that the Minister and the Department are taking a prudent approach regarding the levels of corporation tax receipts and are not returning to the days of "When I have it, I spend it."
It is my understanding that the Committee on Budgetary Oversight will be examining a number of issues relating to corporation tax in 2017, including the sustainability of the receipts. As noted in the Minister's Budget Statement, he asked Mr. Seamus Coffey to perform a review of the corporation tax code. This review is ongoing and, as part of it, the Minister has asked Mr. Coffey to examine the corporation tax receipts. Therefore, although the specific report that has been requested by the Deputy will not be produced, it is clear that the matter has been and is currently being scrutinised.
Given the fact that an analysis has been performed by the Revenue Commissioners and the matter will be further examined in the forthcoming review of the corporation tax code, it is not proposed to accept the amendment. My understanding is that the Coffey report will come towards the end of the second quarter of 2017 and will be published thereafter.
I move amendment No. 119:
In page 47, to delete lines 31 and 32.
When the three-year extension of the capital gains tax farm restructuring relief to 31 December 2019 was announced in budget 2017, it was understood that this extension would require State aid approval. Accordingly, a requirement for a commencement order for this measure was included in section 28(2) of the Finance Bill, as published.
It subsequently emerged that State aid approval is not required. Hence, there is no requirement for a commencement order. For this reason, section 28(2) of the Bill is being deleted. This will have the beneficial effect of ensuring that the extension of the relief will take effect immediately on the expiry of the current deadline 31 December 2016. As a result, farmers availing of the relief will not face any potential delay in benefitting from it. I commend the amendment to the committee.
I move amendment No. 120:
In page 48, between lines 24 and 25, to insert the following: “30. The Minister shall, within one month of the passing of this Act, prepare and lay before Dáil Éireann a report on options available for the introduction of a rate of 3 per cent betting duty for online and in-shop bets to be paid by the customer.”.
I have been raising this for a number of years. It relates to something that has gone untaxed for a long time. We have introduced in recent Finance Acts a betting duty for shops and online in respect of remote operators. We have also introduced new legislation to govern that.
Issues relating to the gambling control Bill have been well rehearsed and are well overdue. There is a huge pressure on the small operators. Currently they pay the 1% betting duty out of their profits which has quite an impact on them. My view is that there should be a 3% rate on winnings and paid by the customer. That would increase the profits of the bookmaker because the tax would be passed on to the customer. We discussed this last year and I thought the suggestion then was let us get the legislation for the 1% bedded down and think about increasing it if needs be afterwards. The needs be is now. This can bring in extra revenue for the State. We are facing a year of significant pressure on revenue not to mention the issue of public pay and impending industrial disputes, strike action and so on. In this budget the Government has spent over half of next year’s budget. The fiscal space has dwindled from €1.2 billion to €530 million. Therefore, I believe this is one of the measures that can increase the overall fiscal space and it should be considered. Other areas related to gambling and which are not subject to taxation should be taxed. Large numbers of transactions take place in respect of other types of activity, such as roulette tables, and the other parts of the gambling books that are not taxed but should be.
It is proposed that it is timely to review the operation of the revised betting tax regime. This will be undertaken through the work of the tax strategy group for publication in 2017 ahead of consideration of the budget for 2018.
I move amendment No. 121:
In page 57, to delete lines 2 to 6 and substitute the following: “34.Chapter 4 of Part 2 of the Finance Act 2001 is amended—(a) in section 136 by inserting the following after paragraph (c) of subsection (6):and“(ca) to take account of and, without payment, take samples of any product referred to in section 97 and of any materials, ingredients and substances used or to be used in the manufacture of such product,”,(b) by inserting the following after section 137:“Substitute fuels
137A.(1)In this section—
‘business’ means any employment, trade, profession or vocation;
‘relevant person’ means any person who has procured or has or had possession, custody or control of a relevant product;
‘relevant product’ means any product in liquid form.
(2) A word or expression used in this section and which is also used in Chapter 1 of Part 2 of Finance Act 1999 has, unless a meaning is assigned to it in this section or the contrary intention otherwise appears, the same meaning in this section as it has in that Chapter.
(3) An officer may make such enquiries of any person as the officer deems appropriate to establish the use or intended use of a relevant product and such person shall give to such officer all information required of such person which is in his or her possession, custody or procurement.
(4)(a) Subject to paragraph (b), where an officer forms an opinion that a relevant product is a substitute fuel or an additive, the powers set out in sections 134 to 136 and section 140 shall apply in respect of that relevant product.(b) An officer may form an opinion that a relevant product is a substitute fuel having regard to the following:(5) Where the officer forms the opinion that the relevant product is a substitute fuel the purchaser shall be liable to mineral oil tax unless the relevant person demonstrates to the satisfaction of the officer that the relevant product was used or is intended for use for purposes other than motor or heating fuel or as an additive.”.”.(i) the relevant person’s business;
(ii) the relevant person’s stated reasons for procuring or having possession, custody or control of the relevant product;
(iii) the nature of the relevant product, including the nature of any package or container;
(iv) the relevant person’s conduct, including his or her use, or stated intended use, of the relevant product or any refusal to disclose his or her use, or intended use, of the relevant product;
(v) the quantity purchased of the relevant product;
(vi) the frequency of deliveries of relevant products to the relevant person;
(vii) any document or other information whatsoever about the relevant product;
(viii) any other circumstances that appear to be relevant.
This amendment to the Finance Act 2001 is to enhance the powers available to Revenue to deal with an emerging mineral oil tax fraud involving substitute fuels. It provides that a Revenue officer, having made enquiries to establish the use or intended use of a product, may form an opinion that it is a substitute fuel. Revenue officers may form such an opinion only after taking into account certain specific circumstances as they apply in each particular case in relation to the product and the person who has possession, control or custody of it.
Substantial progress has been made in recent years in eliminating the type of fuel fraud known as fuel laundering. This progress has been recognised in a recent report by the Comptroller and Auditor General. However, fuel fraud practices continue to evolve and continued vigilance in this area is vital. I am advised by Revenue that certain types of mineral oil are being imported into the State for use as substitute fuels for motor vehicles but are being described as lubricants. Such fraud is spreading across the EU and in some instances Revenue officers have detained and seized quantities of such mineral oils.
Existing mineral oil tax legislation applies a charge to substitute fuels. However, issues arise in practice in proving that such products are suitable or intended for use as motor or heating fuel. The proposed amendment will provide for Revenue powers to address such fraud and will not impact on the legitimate trade. We are aware from past experience that fuel fraud presents a serious threat to the Exchequer and to legitimate trade. To ensure the progress made in recent years in addressing such fraud is not undermined, it is essential to address this fraud risk in a preventative way and at the earliest opportunity.
I should inform the committee that there may be a requirement to make a minor amendment to this legislation. If this proves to be the case, the Minister intends to bring this amendment forward on Report Stage.
Is it possible between now and Report Stage for the Minister of State to furnish a note on the effectiveness of the excise on cigarettes? There was to be an effective floor but that does not seem to be in place any longer, mainly because of the divergence in price of more than €2 per pack of 20 between value brands and normal brands. I am not a smoker so I do not know that is the case. The section reads, “€288.22 per thousand together with an amount equal to 9.52 per cent of the price” and “(b) €325.11 per thousand”, which shows there are different rates. The tax strategy group for budget 2017 said it was prudent in respect of raising the minimum excise duty on cigarettes but that does not seem to be the case. There does not seem to be a floor any longer. Can I have a note on it? If the Minister of State has notes, I would appreciate if he would read them into the Official Report. If there is a divergence in price and we are not getting the minimum level expected, I would like to know why. I would like to have the details on how excise on cigarettes is calculated between now and Report Stage, please.
Our party supports the increase on tobacco products as a health issue and believes it is appropriate. We have always said that we need to combat the black market activity which is big in some areas. There is additional money provided in the expenditure for Revenue personnel. Will the Minister of State confirm that the Revenue Commissioners are completely satisfied, without reservations, with the costings of €65 million for this measure, given that they have advised that the measure could lose the Exchequer up to €44 million?
The Revenue Commissioners' ready reckoner provides for a range within which an increase in excise on tobacco may result in increased or reduced revenues. This reflects the possibility that an increase in the price of cigarettes could result in a disproportionate change in consumer behaviour. The Minister for Finance has made no secret of the fact that in recent years increases in excise duty on tobacco have been testing the boundaries of diminishing returns. To date, however, the revenues from tobacco have been holding up and the increases provided for in recent years using the same price elasticity used for the 2017 forecast have been realised and the projections for 2016 point to a similar outcome. It must be pointed out that increases in tobacco excise, as well as raising revenues, are designed to meet the health objective of reducing smoking prevalence. On this basis, any reduction in excise receipts is more than compensated by the health benefits and the consequent savings that will arise in the health sector.
I am not familiar with so-called heated cigarettes but it has been reported to me that they come in rolls of tobacco that are inserted into an electronic device and inhaled. They are not in Ireland but it is suggested that they may be introduced here. Currently they fall to be taxed as smoking tobacco which has an excise rate of €232.64 per kilogramme as opposed to the excise rate for cigarettes which is €288.22. Is there any expertise in the room as to whether if they were introduced in Ireland they would avail of a lower excise rate than regular cigarettes?
The product is new to me. It is not here yet but Revenue is considering its implications.
To be helpful, the understanding is that the industry is not planning to introduce it here, certainly not in the near future.
This section extends the vehicle registration tax, VRT, relief for hybrid electrical vehicles until December 2018 and for electric vehicles until December 2021. I have no issue with that. I have always wondered whether one of those vehicles would get me from Gweedore to Leinster House but we will have to wait for more advances before we can go down that road without having to stop and plug in. There is a view that VRT has been ruled to be illegal or that the European Union will impose a fine on Ireland for applying vehicle registration tax. Will the Minister outline the accurate legal position and our interactions with the European Court of Justice on Ireland's application of VRT? He might also outline whether there is a case pending in the European Court of Justice regarding Ireland's levying of the full VRT on hired and leased cars from abroad, and presumably across from the Border. It is an issue in my county where cross-Border workers are supplied with a car. For example, when health board staff in the North travel across the Border to Donegal where they reside, they have to pay VRT on the vehicle and it is not their car.
It is not illegal. VRT is not harmonised among EU member states. There is a different application depending on the country. I am informed there is a case ongoing on which I cannot comment but the position is a strong one on this side.
I am talking about where there is no free movement. If someone takes a car across the Lifford bridge they are hit with a levy. That is the reason people are up in arms about VRT. The concept of free movement of goods applies but if one wants to get the IRL number plate, one has to pay a tax.
I move amendment No. 122:
In page 67, after line 35, to insert the following:
“Value-Added Tax in respect of Charities
45. The Minister shall, within 3 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the introduction in 2017 of a capped Value-Added Tax compensation scheme for charities with reimbursement to commence in 2018.”.
This is an issue that has come up nearly every year on the Finance Bill. A report was prepared by the Department of Finance working group which involved Department officials, members of the Irish Charities Tax Reform Group and a representative of Ernst & Young, EY, which was completed last year. The report examined the options around introducing a VAT compensation scheme. The Minister will be familiar with the background to that. In the region of €77 million in VAT is paid by the charitable sector every year. The working group examined a number of different models on the possible introduction of a compensation scheme in Ireland, including one in the United Kingdom, a Dutch model and the Danish scheme, which seems to be a popular one. I am aware money has not been provided for such a scheme to be introduced by way of VAT compensation in 2017 but the Minister might confirm the policy position of the Government following the completion of that report. Is the Government minded to introduce such a compensation scheme for charities that are absorbing much of the money from fundraising by volunteers to pay for VAT on goods and services and on capital projects also?
I support Deputy McGrath's amendment. There are people throughout the country at various levels collecting moneys in various ways, whether through Strictly Come Dancing events, street collections, log sales or whatever and it is unfair that the State takes the VAT portion of that money. I would like to hear the Minister's response on that. I know there is a cost to the Exchequer but there are areas where the Exchequer should forego some funds, and this has the potential to be one of them.
I raised this issue in my first year in the Seanad. It breaks my heart to think that there are people who are raising money for vital services the State should be providing and that the State is benefitting from that action. We must start to move on this area. It is complex. Obviously, the EU has a role regarding it but there are recommendations, and Deputy McGrath's amendment is worthy of our support.
To be brief on this, in terms of the amendment, the Minister, Deputy Noonan, mentioned in his budget day speech that he had asked his officials to engage with the working group with a view to reviewing the options available to provide compensation to charities as regards the burden of VAT, while being mindful of fiscal constraints. I understand from officials that contact was made with the Irish Charities Tax Reform, ICTR, and a meeting was held last week. A report is expected at the end of the second quarter of 2017 and it will be brought forward, in so far as the tax strategy group process is concerned, in advance of the budget for 2018. On that basis I ask the Deputy to withdraw the amendment.
Is the Government minded to introduce such a scheme? A good deal of preparatory work was done by the working group and it can be done in a manner consistent with European Union VAT law. I fully understand that the liability has to be capped. It is capped in Denmark at €20 million. I do not believe anyone is suggesting that we should start at that level here but it would be a real breakthrough if we could make a start on this. It is an issue on which there could be cross-party support and people of non-party could contribute to a consensus to make a move on this in the budget year 2018, but that means doing a lot of work over the course of 2017. It is very deserving and it should be done. I will withdraw the amendment on the basis that the Minister will come back on the details of that.
I am trying to find the reference to the powers it provides to the Minister. It seems to be significant. The flat-rate addition can be taken from an entire sector. I am concerned about how it could be taken from an entire sector. What would prompt an entire sector losing this?
The new section 86A will provide the Minister with the power to make to make an order excluding particular agricultural goods or services as specified in that order from the flat-rate addition scheme. The power can be exercised where the Revenue Commissioners have carried out a review and the Minister is satisfied that because of business structures, contractual arrangements or models in place in a particular sector, the application of the flat-rate addition within that sector has resulted in and would otherwise continue to result in a systematic excess of flat-rate addition payments over VAT on inputs incurred by flat-rate farmers in that sector. Where such an order has been made, any farmer who supplies these particular products or services can elect to register to reclaim VAT on their inputs. Therefore, VAT on inputs should not be a cost to farmers who no longer receive flat-rate addition payments in respect of their supplies.
It is interesting as the legislation speaks about business structures or models. In a sector, the same business model or structures would not universally apply. It allows for the entire sector to lose the flat-rate addition.
There are indications that certain structures or models have emerged in some sectors which, through a combination of normal VAT deductability rules and a flat-rate scheme, result in a much higher level of flat-addition payments and VAT recovery in the sector than would otherwise be available. VAT should not be a cost of business but simplification schemes should not result in businesses being overcompensated. Where there is overcompensation of flat-rate farmers in certain sectors for VAT borne on their input costs, this would have implications for VAT neutrality and possibly competitiveness within the sector and the agricultural industry generally.
In so far as Article 292.2 of the VAT Directive is concerned, under which we must operate, it allows Ireland to exclude from the flat-rate scheme certain categories of farmers, such as pig, dairy and poultry farmers. Where these schemes occur, they are likely to be widespread and because of their nature they are unlikely to arise in any sector other than those which are highly structured with a very close relationship between producer and processors. It is possible that a particular sector, given its size or the way it is structured, could be taken out. We could not specify it to an individual so the sector would be taken out. The operation for VAT deduction would then happen in the normal way and not in the flat-rate scheme.
In any sector there may not be universality in terms of the type of model applied. It is something we will probably return to on Report Stage but I just wanted clarification on whether an entire sector could lose the flat-rate addition.
I will pick up on the issues raised by Deputy Doherty. We are getting significant feedback from the poultry sector in particular. Nobody can defend any systematic excess payment of the flat-rate addition, but the feedback from individual farmers in the poultry sector and the representative bodies is that if this is introduced on 1 January next year, it will be devastating. That activity is concentrated in a particular number of counties where much of its employment and activity are generated. Will the Minister of State advise the committee if that sector is the origin of this proposed change by the Revenue Commissioners and the Department? Has the Department considered the impact this change would have if introduced on 1 January 2017? Is there any merit in allowing the sector some time to review the structures in order that it can mitigate the impact of this change in such a short period?
I cannot speak to a particular sector but this is just an enabling provision. Nothing is coming into effect from 1 January 2017 as it might pertain to a particular sector. The Revenue Commissioners might do a piece of work or carry out a review, and if the Minister is satisfied, following that work, that there are business structures, contractual arrangements or models employed within a sector that systematically achieve excessive VAT recovery, the Minister will make an order prohibiting payment of the flat-rate addition in respect of specified goods or services supplied by farmers in that sector. The farmers may apply and register for VAT to achieve a deduction in the normal way.
I understand the fear out there and I have had representations on it in so far as this will be something that will happen on 1 January for a particular sector. That is not the case. It is a general enabling provision if the Revenue Commissioners conduct a review. If the Minister is satisfied on the back of that review that this is happening in a particular sector, he will have the power at that point - next year or the year after - to make an order in this regard.
If those structures were found to be in place, they could be unravelled so, in effect, the Minister would not need to make an order. That is also a possibility that would remain open if this was found in a particular sector. The order would be by statutory instrument.
I know this is an enabling provision and it does not trigger anything automatically but Deputy McGrath spoke about the sector. We know what Brexit has done to some farmers, particularly those in some sectors and where the activity is close to the Border. Any activity as described by the Minister of State, if it is going on, is not illegal. It is completely legal at this point so we are not talking about tax evasion. This is about whether the sector is benefiting in excess of what was originally intended.
I welcome that the Minister of State is saying that it appears there will be sufficient time provided for the sector, if need be, to restructure or allow proper consultation. The fear is that the Revenue Commissioners will do a report, the Minister will come in and take the flat-rate addition and an agricultural sector will be wiped out. We have other provisions relating to offshore money and allowing people to pay penalties, meaning everything will be forgiven and forgotten. The lead-in period for that is longer than for this sector, although the sector has not broken any laws at this point. Excessive compensation should be dealt with and I welcomed the idea on Second Stage. The question is about the instrument and addressing the fear that the intention of the Government is to pull the rug from under an industry. These sectors will not be able to survive if they do not have ample time to restructure in accordance with the Revenue Commissioners' wishes. It has provided a clean bill of health to the sector until now.
If there is a particular sector that feels the provision is directed at it, people should know it is an enabling provision and there is more than enough time for structures to be changed in order that there would not be any concern if the Revenue Commissioners did a review to find if excessive VAT recovery had been achieved in a systematic way. Nothing is happening on 1 January 2017 with respect to a review or order as it is just an enabling provision. There is plenty of time between now and any review that the Revenue Commissioners might conduct for any systematic structures to be unwound if a sector feels it is directed at it.
It goes beyond structures. Certain sectors may benefit from the structures, and although it may be simple enough to unwind a structure, it leaves a hole. Unless time is found to fill the hole with regard to income, the sector will be put out of business. That is the problem.
The Government needs to reassure the sector that it wants to work with the sector and ensure the sector is stable and sustainable into the future even with these new strong powers. Regardless of the type of model used everybody could lose the flat rate edition in a particular sector as a result of this provision. The Minister can introduce the scheme by the stroke of his pen. There is no requirement for consultation within the sector or appeals mechanism. Such a situation would frighten anybody. Farmers understand the benefits of the flat rate edition but their fears must be addressed. I shall leave my comments at that because we might come back to it at Report Stage. I do not dispute the substance of the amendment. I am concerned about the approach that the Government will adopt.
I move amendment No. 124:
In page 72, between lines 4 and 5, to insert the following: “Amendment of section 86 of Principal Act (exemption relating to certain dwellings)
51. The Principal Act is amended by substituting the following for section 86:
“Exemption relating to certain dwellings
86.(1) In this section—‘dwelling house’ means—(8) Where the consideration for the sale or disposal of an inherited dwelling house, or a replacement dwelling house, as the case may be, (in this subsection referred to as the ‘sold dwelling house’) exceeds the consideration for the acquisition of any replacement dwelling house (in this subsection referred to as the ‘acquired dwelling house’) acquired as a replacement for the sold dwelling house, then the value of the sold dwelling house which is chargeable to tax under subsection (6) shall be reduced in the same proportion as the consideration for the acquired dwelling house bears to the consideration for the sold dwelling house.(a) a building or part (including an appropriate part within the meaning of section 5(5)) of a building which was used or was suitable for use as a dwelling, and‘relevant period’, in relation to a relevant dwelling house comprised in an inheritance, means the period of 6 years commencing on the date of the inheritance;
(b) the curtilage of the dwelling house up to an area (excluding the site of the dwelling house) of 0.4047 hectares, but if the area of that curtilage (excluding the site of the dwelling house) exceeds 0.4047 hectares, then the part which comes within this definition is the part which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the dwelling house;
‘successor’ includes a transferee under an inheritance referred to in section 32(2).
(2) In this section a ‘relevant dwelling house’, in relation to a disponer or a successor, as the case may be, is a dwelling house that—(a) was occupied by the disponer as his or her only or main residence at the date of his or her death,(3) For the purpose of subsection (2), a disponer or a successor, as the case may be, is deemed to occupy a dwelling house for a period during which he or she ceases to occupy that dwelling house in consequence of his or her mental or physical infirmity.
(b) was continuously occupied by the successor as his or her only or main residence—(i) throughout the period of 3 years immediately preceding the date of the inheritance, or(c) is the only dwelling house to which the successor is beneficially entitled or in which the successor has a beneficial interest at the date of the inheritance of that dwelling house, whether or not that successor had such an entitlement before the date of the inheritance or acquires the entitlement by virtue of that inheritance.
(ii) where the dwelling house replaced another dwelling house as that successor’s only or main residence, the first-mentioned dwelling house and the dwelling house that was replaced as that successor’s only or main residence, for periods which together comprised at least 3 years falling within the period of 4 years immediately preceding the date of the inheritance,
(4) Subject to subsections (5) and (6), a relevant dwelling house is exempt from tax in relation to the inheritance by the successor of the dwelling house and the value of the dwelling house shall not be taken into account in computing tax on any gift or inheritance taken by a successor who takes an inheritance of the relevant dwelling house.
(5) For the purposes of subsection (4), a dwelling house shall not be regarded as a relevant dwelling house where it is taken—(a) by way of a gift, other than where it is taken by a dependent relative under subsection (9), or(6) Subject to subsection (7), a dwelling house shall cease to be regarded as a relevant dwelling house where—
(b) under a disposition referred to in paragraph (c) of section 3(1).(a) the dwelling house is sold or disposed of (either in whole or in part) within the relevant period and before the death of a successor, or(7)(a) Notwithstanding subsection (6), a dwelling house shall not cease to be regarded as a relevant dwelling house where—
(b) a successor ceases to occupy the dwelling house as his or her only or main residence during the relevant period, and, as a consequence of such sale, disposal or cessation—(i) tax shall be chargeable in relation to the inheritance by the successor of the dwelling house, and
(ii) the value of the dwelling house shall be taken into account in computing tax on any gift or inheritance taken by a successor who takes an inheritance of the relevant dwelling house, as if that dwelling house had not been a relevant dwelling house at the date of the inheritance.(i) the entirety of the consideration for the sale or disposal of the dwelling house (in this subsection and in subsection (8) referred to as the ‘inherited dwelling house’) is used by a successor to acquire a dwelling house to replace the inherited dwelling house as the successor’s only or main residence (in this subsection and in subsection (8) referred to as the ‘replacement dwelling house’), the period of occupation of which as the successor’s only or main residence, when added to the period of occupation of the inherited dwelling house as his or her only or main residence, amounts to an aggregate period comprising at least 6 years falling within the period of 7 years commencing on the date of the inheritance,(b) Subparagraphs (iii) and (iv) of paragraph (a) shall apply to a replacement dwelling house, as they apply to a relevant dwelling house.
(ii) a successor is of the age of 65 years or over at the date of the inheritance of the dwelling house,
(iii) a successor ceases to occupy the dwelling house in consequence of his or her mental or physical infirmity (which infirmity is certified by a registered medical practitioner who is registered in the register established under section 43 of the Medical Practitioners Act 2007), whether or not the dwelling house is sold or disposed of, or
(iv) a successor is required to be absent from the dwelling house in consequence of any condition imposed by his or her employer requiring the successor to reside elsewhere for the purposes of performing the duties of his or her employment.
(9)(a) In this subsection—‘relative’, in relation to the disponer, or to the spouse or civil partner of the disponer, as the case may be, means lineal ancestor, lineal descendant, brother, sister, uncle, aunt, niece or nephew;
‘dependent relative’ means a relative who is—(i) permanently and totally incapacitated by reason of mental or physical infirmity from maintaining himself or herself, or(b) For the purposes of this section, a dependent relative who takes a gift of a dwelling house shall be deemed to take the dwelling house as an inheritance on the date of the gift.
(ii) of the age of 65 years or over.
(c) Where a dependent relative takes a gift of a dwelling house, paragraph (a) of subsection (2) shall not apply for the purposes of determining whether the dwelling house is a relevant dwelling house.”.”.
With the Chairman's permission, I propose to take amendments No. 124 to 126, inclusive, together as they all relate to section 86 of the Capital Acquisitions Tax Consolidation Act 2003, that deals with an exemption from capital acquisitions tax on the receipt, by way of a gift or an inheritance, of certain dwelling houses. I have proposed amendment No. 124 and I shall deal with it first.
It is important in the context of this particular relief to give some background to how the relief has developed over time since its introduction by the Finance Act 1991. The relief originally applied to the inheritance of a dwelling house by elderly brothers and sisters of the deceased who had lived in the house with the deceased for at least five years before his or her death and who did not have an interest in any other house. The relief was capped at the lesser of £50,000 or 50% of the value of the property. Subsequent amendments up until the Finance Act 1998 saw the relief extended to include siblings of any age as well as parents, grandparents, nephews and nieces. The amount of the relief was also increased to the lower sum of £150,000 or 80% of the value of the house.
The relief was radically altered by the Finance Act 2000 that extended its scope to include gifts of dwelling houses and removed the requirement that the beneficiary be related to the donor. The relief was extended to houses other than the donor’s principle private residence provided that the beneficiary had lived in the house for the three years preceding the gift or inheritance. In addition, the monetary cap on the value of the house was removed so that the relief became a full exemption from tax. The operation of the relief has remained largely unchanged since these changes were made.
The original policy objective of the relief was to alleviate the hardship of an inheritance tax liability for a person who inherits a house in which he or she had been living with the deceased and to ensure that the person did not have to sell the house to pay the tax liability. Over time the relief has moved away from its original policy focus.
Permitting homes to be gifted allows for the planned transfer of wealth in the form of residential property in a way that circumvents the restrictions imposed by the various lifetime tax-free thresholds that apply in respect of capital acquisitions tax thus leaving these thresholds available to cover other forms of wealth transfer. There has been increasing pressure for the exemption to be abolished or reformed. Last year the Minister considered the matter in the context of the Finance Bill 2015. He decided against proceeding with an amendment at that time due to there being insufficient time for a considered examination of the matter. Deputies Doherty and Burton have proposed amendments in this Finance Bill that I shall address shortly.
Statistics provided by Revenue show that almost 3,000 claims for the dwelling house exemption were made in the years 2011 to 2015, inclusive. An increasing trend is apparent with the number of claims increasing by 14% from 2013 to 2014 and by 19% from 2014 to 2015. Almost a quarter of the claims related to gifts with the number of such claims increasing by 13% from 2014 to 2015.
The full cost to the Exchequer of the use of the exemption for tax planning is hard to calculate. Revenue has advised that, because the practice is not illegal, it is not often flagged and the data available to investigate the issue has been limited. It conservatively estimates that the potential cost over the period 2011 to 2015, inclusive, was in the region of €18.76 million, or an average annual cost over the period of €3.75 million.
I propose that the dwelling house exemption, as it currently applies, be significantly revised. I also propose that section 86 of the Capital Acquisitions Tax Consolidation Act 2003 be replaced in its entirety to give effect to the changes and to improve the clarity of some of the existing provisions. The general intention is to realign the exemption with its original policy objective.
The changes proposed will have two principal effects. First, the exemption will only be available for inheritances. With one exception, it will no longer be possible to receive a tax-free gift of a dwelling house. The exception will be where a person gifts a dwelling house to a dependant relative. For this purpose, a dependant relative is a direct relative of the donor, or of the donor's spouse or civil partner, who is permanently and totally incapacitated because of physical or mental infirmity from maintaining himself or herself or who is over the age of 65. The intention of allowing such gifts is to facilitate independent living for infirm and elderly people.
Second, the inherited dwelling house must have been the donor's principal private residence at the date of death. Thus, it will no longer be possible for a single donor to transfer more than one property tax-free. This requirement will be relaxed in situations where the donor lives elsewhere at the date of death, such as in a nursing home, because he or she has had to leave the house due to ill health. In the case of dependant relatives receiving a gift of a dwelling house, the house does not have to have been the principal private residence of the donor.
A feature of the relief that is being retained is the requirement for the person inheriting the house to occupy that house for a further six years to continue to qualify for the exemption. This six-year requirement for continued occupancy does not currently apply when the beneficiary is aged 55 or over. This will be increased to 65 years in recognition of changing life expectancies and working patterns.
Some of the current provisions that are being re-worded to improve clarity relate to the following: the ability of a beneficiary to sell the inherited house within the six-year holding period as long as the proceeds are used to acquire a replacement principal private residence; the calculation of the amount of exempted tax to be recovered where only part of the disposal proceeds from the inherited house are used to acquire a replacement house; the permitted alternative principal private residence of a donor or beneficiary to go beyond a hospital, nursing home or convalescent home; and the restriction on a beneficiary having an interest in another dwelling house at the time of the inheritance. The changes will take effect from the date on which the Finance Bill is enacted.
I believe the proposed amendment addresses the unintended application of the current exemption and realigns it with its original intention while taking account of some practical issues that have been identified. I am confident that it will address the various criticisms that have been made about the way in which the exemption has been used. I recommend the amendment to the committee.
I shall now address the amendments tabled by Deputies Doherty and Burton. The intention of Deputy Doherty's amendment seems to be to restrict the dwelling house exemption to a donor's principal private residence but to allow for situations where the donor has to leave the house because of his or her physical infirmity or mental incapacity. I think the Deputy will agree that this is one of the effects of my amendment. In the circumstances, Deputy Doherty may consider that there is no need to pursue his amendment. My amendment is more comprehensive and addresses many other aspects of the exemption than that addressed by the Deputy. For this reason I do not propose to accept his amendment.
Deputy Burton has proposed that a report on the gifting, tax-free, of valuable properties from parents to their children within the conditions of the current dwelling house exemption provision be prepared and laid before the Dail. I have already referred to the possibility of such property transfers happening and have provided some statistics from Revenue on the extent to which this is happening. My proposed amendment will put an end to such arrangements by restricting the exemption to inheritances of dwelling houses. Parents will no longer be able to gift properties to their children and qualify for the exemption unless that child is a "dependant relative" as defined. Children can continue to inherit the "family home" and avail of the dwelling house exemption. In the circumstances, there is nothing to be gained by producing an historical report of such arrangements. In the light of my proposed amendment, Deputy Burton may consider that there is no need to pursue her amendment. For the reasons outlined, I am not prepared to accept her amendment.
I welcome amendment No. 124 and withdraw my amendment as the former is one of the proposals that we put to his officials during the briefing meeting. The amendment will close the loophole. We do not know how much has been lost but we do know that the dwelling house exemption costs the State about €52 million. People argue over the family home and that is why we support the amendment. It is right and proper that the person living in the family home is exempt. However, I will not be as complimentary when we discuss the increase in CAT thresholds. To deal with CAT one must deal with real issues such as the one that we are discussing and allow somebody who have lived in the family home to inherit it tax-free. We will discuss related matters when we discuss the Government amendment to section 51.
The Minister of State outlined in his statement some statistics that underpin his amendment. It is clear that there has been a significant increase in the number of people who availed of the exemption.
I believe there has been a greater awareness of it in recent times. There is no doubt it has been used as a tax-planning instrument in many cases. I know that Revenue raised the issue and some concerns about the dwelling house exemption in advance of the budget more than a year ago. The Government is now coming forward with these proposals. From what date will these changes take effect in respect of transactions? Obviously, people will be interested in that.
I addressed this on Second Stage. The section involves a measure that is costing the Irish State €22 million in the increase of the threshold for CAT. It is my view that there is already a generous threshold at €280,000 for group A. We know that if we were to apply this increase to the 2014 figures, the people who would have benefitted from it would have been 2,128 individuals in group A. The group A threshold is costing something like €18 million alone. It is a huge tax write-down for a very small cohort of individuals.
I understand that house prices in Dublin are obviously higher than the rest of the country. Anywhere else in the Twenty-six Counties outside of Dublin, the average house would be transferred to a son or daughter under the threshold and, in some cases, well under the threshold, as the average house price in some areas is about 50% of the threshold. Inheritance is one of the areas that leads to inequality. As the Ministers continue to refer to, this is a tax on wealth. However, by increasing the thresholds, what they are doing is increasing inequality. I believe there is no justification for this, given the pressures. This has to be set in the context of the other pressures in the economy. A small group of individuals benefitting from this is not the right way to do it.
There may be ways in which this needs to be tweaked. For example, when somebody is inheriting a family home, we always think about it in terms of property, but that is not always the case. This could be hard cash that is going into somebody's bank account. We allow for the first €280,000 of that to be tax free. There are scenarios, particularly in parts of Dublin, in which properties are being left to a child or a sibling that are in excess of €280,000. They might be cash-poor but become very much asset rich and subsequently have a difficulty in paying the CAT. We should come up with easier ways for them to actually pay for it, whether that is over a longer period of time or whatever. Despite the fact that it is a property and we think about it in that way, these people are not living in the family home. If they were living in the family home, it would be completely tax free, as we dealt with in the dwelling home exemption. At the end of the day, what they inherit is worth more than €280,000. They have inherited that tax free.
For many people, inheriting €280,000 is never going to happen. Coming into that amount of money would be like winning the lotto for some people. That is already tax free. To push it up to €310,000 is not appropriate. As I said, it is a small number of people who will benefit from it. I have the full breakdown of the number of individuals. The Government's proposal is to bring this up to €500,000. This is the wrong way to proceed. It would cost €75 million to do that. Sticking with what we have today, €22 million of a tax break for just more than 2,000 category A individuals located in Dublin is not the most pressing thing that we need to do with our revenue, which is scarce. We hear about pay restoration and the two-tier pay grades for nurses, teachers and all the rest. Some €80 million is needed for pay for equality. The cost of this proposal would go a quarter of that way. I am not suggesting one or the other. People who inherit €280,000 tax free, as it is only the portion above that that is chargeable at the CAT rate, are not the people who have the most pressing needs.
There are genuine cases out there, but we should not be introducing a law across the board. In my own county, for example, the average house price is half of the existing threshold, €140,000. Yet, a very wealthy mother or father in Donegal can now gift their child €310,000 tax free. That is the worst type of inequality. It is the passing down of wealth from generation to generation. There is a widening gap in Irish society; it is a global issue. This provision is definitely going in the wrong direction.
During the financial crisis, it proved necessary to reduce the threshold at which capital acquisitions tax applied to preserve the level of revenue as far as possible. In budget 2016, the Minister was in a position to begin a process of reversing these reductions. He increased the group A threshold from €225,000 to €280,000. He also saw this increase as the start of a process and, depending on the continuation of the economic recovery and his reappointment as Minister for Finance, he said he would examine the scope for further increases in subsequent years. Economic recovery has continued and in the Minister's budget statement this year, he announced a further increase in the group A threshold to alleviate higher tax demands on individuals who are inheriting family homes as a result of increasing property prices. This year, he is also increasing the group B and C thresholds.
The Deputy has a concern about the inheritance of a home in which a person does not live and the payment of the tax that would be due on the amount above what is relieved. Inheritors have a right to pay any tax due over five years. The Revenue Commissioners have discretion to accept payment over a longer period in cases of hardship. There are methods by which that can be achieved.
Amendments No. 128 to 134, inclusive, are related and may be discussed together. Amendment No. 129 is an alternative to amendment No. 128, amendment No. 131 is an alternative to amendment No. 130, and amendment No. 134 is an alternative to amendment No. 133.
I move amendment No. 128:
In page 74, line 31, to delete “1 May 2017” and substitute “1 January 2017”.
This amendment relates to the deadline in the legislation of 1 May 2017. My amendment proposes that it be 1 January 2017. The Minister has given individuals who have engaged in criminal activity until 1 May 2017 to get their house in order by allowing them to make a voluntary disclosure of tax evasion involving offshore assets and income, entitling them to mitigated penalties and avoiding criminal prosecution by coming forward voluntarily to the Revenue Commissioners. As I said on Second Stage, the deadline must be seen in the context of extra information which the Revenue Commissioners now have at their disposal from closer co-operation and information exchanges worldwide on the tax affairs of individuals in other jurisdictions. The deadline is in advance of a greater clampdown on offshore assets next year by the Revenue Commissioners, which they have planned for and announced.
I must question the accommodating approach being taken to these people who have broken the law with the 1 May 2017 deadline. I ask that the Minister remove the option of mitigated penalties and no criminal prosecution. He must end any option of preferential treatment and pursue them with the full rigours of the law, particularly in light of the fact that the Revenue Commissioners have additional information as a result of the greater co-operation and exchange of information worldwide on the tax affairs of Irish and other individuals.
I understand the reason the Deputy is proposing that the date for the implementation of this measure be brought forward. However, we have estimated a yield of €30 million in the budgetary arithmetic for the measure in 2017. If insufficient time is given for the initiative to work then any change in the date could prove counterproductive in that regard. In addition, when dealing with measures of this nature, sufficient time must be afforded to the affected individuals to assemble the necessary information, documentation and so forth to make the disclosure and arrange for the payment of tax and interest, which will probably involve engaging tax advisers, agents and accountants.
I would be particularly concerned if the date were to be brought forward to 1 January as that would be likely to create problems for agents. The income tax return filing date is 31 October, or 12 November for the Revenue online service, so the agents are now in their busiest time of the year. Bear in mind that the Christmas period could also contribute to making it very difficult for them to get submissions in to Revenue for clients with offshore matters.
I also remind the committee that the success of this initiative is predicated on its voluntary nature. In terms of the cost and efficiency of the collection of taxes by Revenue, it is better that such processes are voluntary. Once the window of opportunity expires, whether it is on 1 May or any other date, then these disclosures will cease. Revenue is fully committed to the pursuit of such cases based on information coming on stream under the various automatic exchange-of-information agreements. Such pursuit is likely to be a more drawn-out process, with additional tax revenues only coming on stream incrementally, albeit with increased penalties.
I emphasise that this measure is not in any way a concession to those who have evaded tax through the use of offshore accounts or who failed to disclose offshore assets or income sources. On the contrary, the measure is a very significant withdrawal of an incentive that is currently available to all tax defaulters, that is, the opportunity to significantly mitigate penalties and avoid publication in the defaulters list by making a voluntary disclosure to Revenue. This, in effect, means that offshore defaulters will face a harsher regime than those whose defaults occur exclusively within the State. On balance, I consider that the date of 1 May next should be left unchanged and, therefore, it is not proposed to accept these amendments.
I do not agree with the Minister of State at all but we will return to this on Report Stage. It is a question of judgment and when one thinks it should end. The Minister of State referred to the inconvenience of Christmas and the pressure it will put on the agents. It is criminal activity that is taking place and it needs to be clamped down upon. There is no reason for us to allow this activity to continue or for a voluntary disclosure regime. I will withdraw the amendment but we will return to the matter it on Report Stage.
I understand the logic in not having 1 January as the date if the Bill becomes law perhaps in the third week of December but why does it have to go to 1 May? I am not convinced on that. Could it be done by March, for example, to give a number of weeks? Can the Minister of State clarify how long the penalty mitigation arrangements have been in place for? Is he proposing to end them? Is there an expectation that there will be a revenue yield from it because there will be a rush to get in before the drawbridge closes? How long were they in place for? What kind of an uptake is there without the mitigation being withdrawn?
We do not have a timeline in respect of how long they will be in place but we can provide on to the Deputy.
To speak to the amendments and the section, the intention is to pursue these people and to get this tax in. A voluntary disclosure regime makes it far easier on the part of Revenue to collect that tax. In so far as the date is concerned, 1 January is too soon if we want to be able to give people an opportunity to pay this tax voluntarily and to give Revenue a chance to collect it. The date of 1 May was seen to be an appropriate date to allow sufficient time for the people coming forward voluntarily to get their affairs in order.
The Minister of State should look to bring the date forward to what is reasonable and practicable, taking the advice of Revenue on board. It was signalled on 11 October that the mitigation arrangements were coming to an end and 1 May is the date stipulated in the Bill. However,.I do not see why it cannot be brought forward somewhat.
How long have these tax evaders been allowed to make voluntary disclosures, meaning that the measures that are currently there do not apply to them, as will be the case until 1 May? How long has that regime existed?
We - the Irish State - have been saying to these tax evaders that if they come to us voluntarily, we will treat them in a particular way. That section says it will be game over from 1 May. The point I am making is that this is not something we are introducing now. It is not a window. It is not an amnesty that says if they come to us between now and 1 May, we will treat them in one way but if they do otherwise, we will treat them in another. These individuals have had ample time. If they cannot get their houses in order by 1 January, that is tough. The full rigours of the law should apply to them. They have been given many years to come forward and they have not done so. The question we should ask is whether this should be immediate or backdated from the day of the publication. I agree that when there is a closing date, there will be extra activity. Even if this was introduced now, people will have weeks to comply. It is not a case of waiting for the Finance Bill to pass in order to move. Does the Minister of State think individuals are not taking heed of what we are discussing now? If we decide that the date is to change to 1 January, 1 February or 1 March, they will know before this meeting is over that it is happening because these individuals are monitoring what we are doing. The State is saying that it is giving them another six months on this.
I thank the Deputy. He is correct, it is not an amnesty. People coming forward under the voluntary disclosure regime will still have to pay their taxes and any fines that might also be added - in other words, taxes, penalties and interest - under the voluntary process. The Chairman of the Revenue Commissioners has expressed his serious concern that shortening the timeframe to a date earlier than May could prove counter-productive. He said that tax defaulters need time to assemble the necessary information to make a proper disclosure and if they do not have time to do so, they will have no incentive to do anything other than wait for and hope that Revenue will for some reason fail to find them. This in turn, will mean a far less productive use of Revenue resources as the Commissioners will have to pursue every offshore case individually.
I move amendment No. 135:
In page 75, to delete lines 35 to 40 and substitute the following:“(i) in paragraph (a), by substituting “a specified sum or an adjusted specified sum (within the meaning of subsection (2C) or (2D)), as the case may be, under subsection (2)(c), including as applied by subsection (2C) or (2D)” for “a specified sum under subsection (2)(c)”,
(ii) in paragraph (b), by substituting “a specified sum or an adjusted specified sum (within the meaning of subsection (2C) or (2D)), as the case may be, under subsection (2)(d), including as applied by subsection (2C) or (2D)” for “a specified sum under subsection (2)(d)”, and”.
Amendments Nos. 135 to 142 relate to section 55 of the Bill, as published, which makes a number of changes to section 1086 of the Taxes Consolidation Act 1997. This is the provision that governs the publication of the names of tax defaulters. The purpose of the amendments, both those in the Bill, as published, and the amendments I am bringing forward today, is toensure that the scheme of publication of tax defaulters operates as intended. The additional amendments reflect further consideration of section 55 since publication and comprise both technical and consequential drafting changes to clarify aspects of the provision and a number of substantive changes to ensure that the provision is comprehensive.
I will address the substantive changes first. In some settlements of tax, interest and penalties entered into by Revenue with a tax defaulter, the settlement amount may comprise an amount relating to a qualifying disclosure made by the taxpayer and an amount relating to matters not subject to a qualifying disclosure. In such cases, it can also arise that Revenue enters into an agreement with the defaulter to pay a sum in settlement of the full amount of tax, interest and penalties due, or the defaulter may decide to pay the full amount of the liability without entering into an agreement. The amendments in the Bill as initiated dealt with the first scenario described above, that is where a settlement sum is paid on foot of an agreement, and clarified the amount to be published in such cases. Amendment No. 136 ensures that the second scenario is also covered, that is where the tax defaulter pays the full amount of tax, interest and penalties without entering into an agreement with Revenue and clarifies the amount to be published in these cases also. The amendment deals with each of these situations in separate new subsections in section 1086 and, whereas section 55 of the Bill, as published, availed of a simple A to B formula to clarify the amount to be published, the amendment does the same thing but by way of a series of definitions to arrive at the adjusted specified sum for publication that works for both types of cases. The amendment puts beyond doubt that the portion of the settlement sum, or of the full liability, in respect of which a qualifying disclosure is made will be excluded from publication, and only that portion relating to matters not subject to a qualifying disclosure will be publishable, provided the publication criteria are met in relation to those matters.
The second substantive amendment is No. 138, which relates to subsection (4A) of section 1086. This is the subsection that facilitates increases in the publication threshold. The Bill, as initiated, amended the mandatory requirement that the Minister for Finance make an order increasing the publication limit in line with the CPI every five years to a discretionary requirement to increase the limit from time to time. The intention was that once the Bill was enacted a ministerial order would be made increasing the limit to €35,000 from the current limit of €33,000.
Inadvertently, it was overlooked that there are in fact two separate publication thresholds in section 1086. One relates to situations where the defaulter has reached an agreement with Revenue to pay a settlement amount while the other relates to persons in whose case the penalty element of the tax, interest and penalties due has been determined by a court. From 2008 to 2010 the two thresholds were the same but diverged when the last ministerial order was made in 2010, because the court penalty-related limit was not referenced in the order. This was a legislative oversight at the time. Clearly the publication thresholds should be standard across all relevant subsections of section 1086 and increase in tandem on foot of any ministerial order increasing the publication limit.
In considering this, the Parliamentary Counsel and the advisory side of the Attorney General’s office have advised that the best solution is for the inclusion in the primary legislation in subsection (4A) of a new definition of "relevant amount" which will be set at €35,000, that is, the new publication threshold. The publication thresholds relating to settlement cases and court penalty cases will then be cross-referenced to the "relevant amount", €35,000, stipulated in subsection (4A). Any future ministerial order will increase the "relevant amount" by the appropriate consumer price index increase in the intervening period and this higher threshold will then automatically apply to both the settlement and court penalty publication thresholds. This approach will obviate the need to make a new order after the Finance Bill 2016 is enacted as the threshold will be up-to-date. While diverging from the Bill, as initiated, this proposed approach is more logical and satisfactory. The purpose of amendment No. 138 is to achieve this. These changes will come into operation on the passing of the Act.
Amendments Nos. 135, 137, 139, 140, 141 and 142 are drafting or technical amendments required to clarify aspects of the provision and take account of consequential changes elsewhere in section 1086 on foot of the substantive amendments described above.
I commend these amendments to the committee.
I wish to advise the committee that I will table a further amendment to section 55 on Report Stage to deal with a technical drafting error.
I move amendment No. 136:
In page 76, to delete lines 4 to 43, and in page 77, to delete lines 1 to 7 and substitute the following: “ “(2C)(a) In this subsection—‘adjusted specified sum’ means the total claim sum less the qualifying disclosure sum;(b) Notwithstanding subsection (4)(a), where the Revenue Commissioners—
‘disclosing person’ means a person who makes a qualifying disclosure;
‘qualifying disclosure’ means a qualifying disclosure referred to in subsection (4)(a);
‘qualifying disclosure sum’ means the part of the total claim sum that is in respect of the matter to which a qualifying disclosure relates;
‘relevant matters’, in relation to a disclosing person, means matters occasioning a liability of the kind referred to in subparagraphs (i) to (iii) of paragraph (c) or (d) of subsection (2), as the case may be, which are known or become known to the Revenue Commissioners or any of their officers;
‘total claim sum’ means the specified sum, in respect of the specified liability (in respect of both the matter to which a qualifying disclosure relates and the relevant matters), referred to in paragraph (c) or (d) of subsection (2), as the case may be, of a disclosing person.(i) pursuant to an agreement of a type referred to in paragraph (c) of subsection (2), oraccept or undertake to accept a specified sum of money in settlement of any claim by them in respect of a specified liability, referred to in paragraph (c) or (d) of subsection (2), as the case may be, of a disclosing person, and the specified liability comprises of the liability relating to the matter in respect of which the person had voluntarily furnished a qualifying disclosure and the liability in respect of relevant matters, then paragraph (c) or (d) of subsection (2), as the case may be, shall apply in relation to the disclosing person in respect of the relevant matters, subject to the following modifications:
(ii) in the circumstances described in paragraph (d) of subsection (2),(I) a reference to a specified sum shall be construed as a reference to an adjusted specified sum;(2D)(a) In this subsection—
(II) a reference to a specified liability, shall be construed as a reference to the part of the specified liability relating to the relevant matters;
(III) the reference in paragraph (c) of subsection (2) to an agreement made by the Revenue Commissioners with a person whereby they accepted or undertook to accept a specified sum of money in settlement of any claim by them in respect of any specified liability of the person, shall be construed as a reference to an agreement (in this clause referred to as the ‘second mentioned agreement’) made by the Revenue Commissioners with the disclosing person whereby they accepted or undertook to accept an adjusted specified sum of money in settlement of any claim by them in respect of the part of the specified liability of the disclosing person relating to the relevant matters, and the second mentioned agreement shall be deemed to have been made in the relevant period in which the Revenue Commissioners accepted or undertook to accept the total claim sum.‘adjusted specified sum’ means the total claim sum less the qualifying disclosure sum;
‘disclosing person’ means a person who makes a qualifying disclosure;
‘qualifying disclosure’ means a qualifying disclosure referred to in subsection (4)(a);
‘qualifying disclosure sum’ means the part of the total claim sum that is in respect of the matter to which a qualifying disclosure relates;
‘relevant matters’, in relation to a disclosing person, means matters occasioning a liability of the kind referred to in subparagraphs (i) to (iii) of paragraph (c) or (d) of subsection (2), as the case may be, which are known or become known to the Revenue Commissioners or any of their officers;
‘total claim sum’ means the sum, being the full amount of the claim by the Revenue Commissioners (in respect of both the matter to which a qualifying disclosure relates and the relevant matters) in respect of a liability, of a kind referred to in subparagraphs (i) to (iii) of paragraph (c) or (d) of subsection (2), as the case may be, of a disclosing person.
(b) Notwithstanding subsection (4)(a), where the Revenue Commissioners accept or undertake to accept a sum which is the full amount of their claim in respect of a liability, of a kind referred to in subparagraphs (i) to (iii) of paragraph (c) or (d) of subsection (2), as the case may be, of a disclosing person and the liability comprises of the liability relating to the matter in respect of which the disclosing person had voluntarily furnished a qualifying disclosure and the liability in respect of relevant matters, the following shall apply in relation to the disclosing person in respect of the relevant matters:(i) for the purposes of subsection (2), paragraph (c) or (d) of that subsection, as the case may be, shall apply, subject to the following modifications:(I) a reference to a specified sum shall be construed as a reference to an adjusted specified sum;(ii) the reference in subsection (2A) to the Revenue Commissioners being deemed to have accepted or undertaken to accept a sum being the full amount of their claim pursuant to an agreement made with the person referred to in paragraph (c) of subsection (2), whereby they refrained from initiating proceedings for the recovery of any fine or penalty of the kind mentioned in paragraphs (a) and (b) of that subsection and the reference to that agreement being deemed to have been made in the relevant period in which the Revenue Commissioners accepted or undertook to accept that sum, shall be construed as a reference to the Revenue Commissioners being deemed to have accepted or undertaken to accept the adjusted specified sum pursuant to such an agreement (in this paragraph referred to as the ‘second mentioned agreement’), and the second mentioned agreement shall be deemed to have been made in the relevant period in which the Revenue Commissioners are deemed to have accepted or undertook to accept the sum being the full amount of their claim.”,”.
(II) a reference to a specified liability, shall be construed as a reference to the part of the total claim sum relating to the relevant matters;
I move amendment No. 137:
In page 77, to delete lines 9 to 12 and substitute the following: “(i) by deleting paragraph (b),
(ii) in paragraph (c)—(I) by substituting “the specified sum or the adjusted specified sum (within the meaning of subsection (2C) or (2D)) referred to in paragraph (c) or (d), as the case may be, of subsection (2), including as applied by subsection (2C) or (2D),” for “the specified sum referred to in paragraph (c) or (d), as the case may be, of subsection (2)”, andand
(II) by substituting “does not exceed the relevant amount referred to in paragraph (a) of subsection (4A) or, where an order has been made under paragraph (b) of that subsection, the amount specified in the last such order made, or” for “does not exceed €30,000, or”,
(iii) by substituting the following for paragraph (d):“(d) the amount of fine or other penalty included in the specified sum or the adjusted specified sum (within the meaning of subsection (2C) or (2D)) referred to in paragraph (c) or (d), as the case may be, of subsection (2), including as applied by subsection (2C) or (2D), does not exceed 15 per cent of the amount of tax included in that specified sum or adjusted specified sum.”,”.
I move amendment No. 138:
In page 77, to delete lines 13 to 21 and substitute the following: “(d) in subsection (4A)—(i) in paragraph (a)—(e) in subsection (4B), by substituting the following for paragraph (b):(I) in the definition of “the consumer price index number relevant to a year”, by substituting “mid-December 2011 was 100” for “mid-December 2001 was 100”,(ii) by substituting the following for paragraph (b):
(II) by substituting “Minister for Finance;” for “Minister for Finance.”, and
(III) by inserting the following definition:“ ‘the relevant amount’ means €35,000.”,“(b) The Minister may, from time to time, by order provide, in accordance with paragraph (c), an amount in lieu of the relevant amount, or where an order has been made previously under this paragraph, in lieu of the amount specified in the last order so made.”,(iii) in paragraph (c), by substituting “the relevant amount or the amount referred to in the last previous order made” for “the amount referred to in subsection (4)(c) or in the last previous order made”, and
(iv) in paragraph (d), by substituting the following for subparagraph (ii):“(ii) does not apply to any case in which—(I) the specified liability referred to in paragraphs (c) and (d) of subsection (2), including as applied by subsection (2C) or (2D), or
“(b) the aggregate of—(II) the aggregate referred to in subsection (4B)(b) in respect of paragraphs (a) and (b) of subsection (2), includes tax, the liability in respect of which arose before, or which relates to periods which commenced before, that specified date.”,“(b) the aggregate of—(i) the tax due in respect of which the penalty is computed,
(ii) except in the case of tax due by virtue of paragraphs (g) and (h) of the definition of ‘the Acts’, the interest on that tax, and
(iii) the penalty determined by a court, does not exceed the relevant amount referred to in paragraph (a) of subsection (4A) or, where an order has been made under paragraph (b) of that subsection, the amount specified in the last such order made, or”,”.
I move amendment No. 142:
In page 77, line 32, to delete “Paragraph (d) of subsection (1) comes into operation” and substitute the following: “Paragraph (c)(ii)(II) and subparagraphs (i), (ii) and (iii) of paragraph (d) of subsection (1) come into operation”.