Oireachtas Joint and Select Committees
Tuesday, 5 November 2019
Select Committee on Finance, Public Expenditure and Reform, and Taoiseach
Finance Bill 2019: Committee Stage
I welcome the Minister for Finance, Deputy Donohoe, and his officials. The Bill was referred to the select committee on 24 October. There are 121 amendments. According to the timetable for today, we are scheduled to continue until 9 p.m. Is that agreed? Agreed. There will be a break at an appropriate stage. The debate will resume tomorrow at 10 a.m. and continue until roughly the same time, depending on how we get on.
If we sit on Thursday, we will begin at 11 a.m., to accommodate Deputy Pearse Doherty, and finish whenever we finish. Is that agreed?
I am very happy to facilitate the committee in any way in respect of Thursday. On Thursday afternoon and Friday morning, however, a Eurogroup and ECOFIN meeting will take place in Brussels, to which I am due to travel, which might mean that for some of Thursday's meeting, the Minister of State, Deputy D'Arcy, will have to take my place. Nevertheless, I intend to do everything else and, depending on how much progress we make tomorrow, it might not be much of an issue.
If any member is substituting for another, the clerk to the committee should be informed. Divisions will be taken as they arise. In accordance with Standing Order 95(3), members attending the meeting should be aware that, pursuant to that Standing Order, he or she may move the absentee's amendment but cannot participate in voting on the amendment.
I call the Minister to commence consideration of the Bill.
I wish to discuss the amendments ruled out of order. I find it difficult to understand because in different circumstances where a rate is to be changed, amendments to alter the rate have been accepted, but they have been ruled out of order. If, for example, the Government wished to change the rate from 20% to 25%, that could previously be amended to change the rate to 24%, 23% or whatever rate was suggested, but such amendments have been ruled out of order. Several amendments have been ruled out of order. It makes our lives difficult and lacks consistency.
We can examine the amendments during the course of the meeting, although an explanation was given as to why each was ruled out of order, which I am sure the Deputy received. He refers to amendments Nos. 22 and 24, which are not at the beginning of the list of amendments. The first amendment in his name ruled out of order has the potential to increase a charge on the people and, therefore, must be ruled out of order according to Standing Order 178(3). I presume that each member who has had an amendment ruled out of order will have received an explanation. If the Deputy wishes to return to the matter, however, I am happy to discuss it again.
There is a tendency for the universal social charge, USC, to be extended, as it will be again until the end of 2020. Does the Minister suggest that a reduced USC for medical card holders is still under consideration? Is a cut-off point in the legislation appropriate? The provision has been extended but it is unlikely that the Government will continue, in each Finance Bill, to extend it every year.
To clarify, I have been involved in making a decision on the matter. My intention is to carry out a formal review of the operation of the relief next year. There is unlikely to be a massive change but until the review is done, it remains appropriate to have an end date. Perhaps that will change when the review is complete.
I move amendment No. 1:
In page 7, between lines 19 and 20, to insert the following:
“Report on abolition of universal social charge 3.Within 6 months of the passing of this Act, the Minister shall produce a report on the benefit of abolishing the universal social charge on all income below €90,000 and replacing it with 4 new income tax bands for income earned between, €100,000 and €140,000; €140,000 and €180,000; €180,000 and €250,000; and over €250,000.”.
The amendment seeks to require the Minister to produce a report on the abolition of the USC for all income under €90,000 and, simultaneously, the introduction of new income tax bands for income above €100,000. We have proposed such a measure for a number of years. The USC continues to be a hated tax for workers. I accept that the Minister will argue it is a good means of catching income, which it is, relative to income tax. Nevertheless, the idea is to convert the USC from being something that hits everybody to being a higher income social charge that hits only those earning more than €90,000. It was originally intended to be an emergency tax because of the crisis but it has become central to the projected revenue of the Department of Finance.
I do not have a problem with reports, in principle, although I do have an issue with abolishing a tax that catches all income, including that of the top 10% of earners, notwithstanding that the Deputy has suggested the introduction of other income tax bands.
I am sure there are pictures of the Minister carrying posters stating "Abolish the USC" during the campaign for the previous general election, and there are definitely such pictures of the Taoiseach. The USC still exists, however, and brought in €3.7 billion last year. After the policy of abolition was ditched, we were promised the USC would be merged with PRSI, a report would be done and progress would be made in that regard, but there has been nothing. There is no progress in the Bill in respect of the matter. Will the Minister indicate where the USC will go? Will it also be captured in the review he is carrying out of the relief for those with a medical card?
There are a considerable number of issues with the proposal Deputy Paul Murphy has made, including an Exchequer cost, significant erosion of the tax base, increased complexity of the tax system and an impact on the competitiveness of our tax code. The Deputy has not specified the level of income tax rates that would apply under the proposal. It is estimated, however, that the removal of the application of the USC on all incomes below €90,000, as suggested, would cost approximately €2 billion in a single year. Assuming no other policy changes to the structure of the charges, it is likely the new income tax bands would need to be as high as 70% to raise the same level of revenue for the Exchequer and ensure that it is a cost-neutral proposal. In the event that it was levied as the USC, the rates would be as high as 70%. Neither of the estimations takes account of any behavioural change that could result from the significant increase in marginal rates of taxation.
Introducing any higher rate would increase the marginal rate of tax. High marginal tax rates are a clear disincentive to work and could cause harm to our international competitiveness.
Introducing a USC exempting all those earning up to €1,731 per week would considerably erode the tax base. The current exemption threshold for USC is €13,000 per annum and it is now estimated that 28% of all income earners will not be liable to USC in 2020. To go ahead with the path suggested by Deputy Murphy would mean that 95% of income earners would be exempt from USC.
The redistributive nature of our tax code has been acknowledged by many experts. Deputies will recall that during the economic crisis it reached a point where 45% of all income earners were exempt from income tax and this was, in retrospect, unsustainable.
Deputy Murphy's proposal could also introduce considerable complexity to the tax code by expanding the current two rate income tax system to a five or six rate system, a considerable additional complexity for taxpayers, employers and Revenue. If such a structure were introduced this would lead to an even more complicated system of taxation. Having regard to all of these measures, I do not believe this is a direction in which we should be taking our tax code. As outlined in previous debates on this, I, therefore, cannot accept the amendment.
On the question that Deputy Doherty put to me, I did publish the report on the integration of USC and the income tax code as part of all the papers across the budget day week, as I think I indicated to him I would. I will be keeping that in mind when I take a look, for example, at the future of the relief Deputy Murphy and I discussed a moment ago.
Does the Minister accept that such a change would make the tax code more progressive precisely by leaving the USC? The USC should be renamed because it would no longer be a USC. Instead, the charge should be called a higher income social charge and only apply to the very top earners in our society, which would be a progressive move. I do not accept the argument that introducing new tax bands is an extremely complex thing. Other countries have more tax bands than we have so it clearly can be done. It is a question of political choices as to whether one hits ordinary working people with a tax like the USC or one does not do that but makes up for that through a combination of imposing a higher income tax on the very highest earners. Bear in mind that for all the talk of the higher marginal rate these higher earners would benefit from the fact that the first €90,000 is not getting hit so it would take a long time before the increased rates of income tax would overcome that. The Minister should make up for it on the basis of income tax but also, which I am sure we will get on to, in corporation tax and wealth tax. This is really about a different model of taxation. In my opinion, there is a broader model of taxation where one actually taxes corporate profits and the significant wealth that exists in our society.
Can the Minister tell me what is the position on USC? Is it still the case that USC will be merged with PRSI? Is that the position at this point in time or is he returning to the previous position whereby USC will be abolished? The Minister has produced papers but what is the current position? This committee is dealing with the Finance Bill, which leaves it as is, and this was promised a number of years ago.
I will respond to Deputy Murphy's question first. To deal with the whole issue of progressivity and fairness, we should have this discussion in the context of the fact that we have a very, very progressive and redistributive tax code in the first place. According to work done by the OECD we are the most progressive EU member state when it comes to the progressivity of our tax code and we are the third most progressive in the OECD. The Deputy will be aware of the information on the reduction in GNI coefficients, which is a measure for looking at the equality of income distribution within societies. Again, it shows that the combination of our tax and welfare code means that we have delivered the seventh largest reductions in market income within the OECD.
On the Deputy's question on what would be the effect of a model such as he proposed, I do accept that it would mean that for those who were on very high incomes, the progressivity or the rate at which they begin to pay more and more tax would accelerate. If one looks at those who are on high incomes one could make the case that for those people it is more progressive. I do think there are trade-offs between one's tax base and how progressive that tax base is. I think one is better off having a progressive broad tax base as opposed to what, I think, the Deputy is suggesting, which is that one would have many people not paying this tax at all and then, for those who are paying it, they pay it at a very progressive rate. The model the Deputy appears to be advocating here is a model that would make our USC code vulnerable all over again in terms of the number of people who would not be paying it.
In terms of the question posed by Deputy Doherty, the report that I published outlined ten different options on how integration between USC and PRSI could take place. The cost varied between €600 million and €1.2 billion per year if one is looking to keep revenue neutral. Because of all of that, it is going to be very difficult to make progress on that in the short term. In the short term, particularly with all of the uncertainty that we have, the main thing we will see in USC will be a variant on what we have done recently, which is either modest changes in rates or people paying different rates of USC on different rates of income versus what they are paying at the moment.
I support the increase in the home carer credit. Can the Minister clarify that the credit is not available to couples who are cohabiting? Is this not an issue that has been flagged before? Cohabitees are at a disadvantage. One can have a cohabiting couple with a child who-----
I would appreciate that. Take the example of a cohabiting couple with a child who has severe disabilities, where the parent is a carer. Home carers are entitled to this credit and they should not, in my view, be disadvantaged because they are not in a civil partnership or formal marriage union. I seek a clarification. I would appreciate if a note could be provided before Report Stage.
I move amendment No. 2:
In page 7, after line 26, to insert the following: “Report on eligibility for and take up of home carer tax credit
4. The Minister shall, within 3 months of the passing of this Act, prepare and lay before the Oireachtas a report on the proportion of people who are eligible for the home carers tax credit but who are not in receipt of such a credit and ways in which the take up of the credit can be improved.”.
My amendment is on the home carer's tax credit. I acknowledge that the Minister published, on budget day, a report, which among other tax expenditures, deals with the issue of the home carer credit.
It does endeavour to address the issue I am raising here and have raised in the past, namely, the level of awareness of this credit and whether those who are entitled to it are claiming it. I know Revenue has made progress in extending this credit automatically to those who are entitled to it but I remain of the view that there are many couples who are entitled to it but are not claiming because they simply do not know about it. Page 89 of the report does seek to address that issue. It talks about the amount claimed versus the amount used. There is a difference of €47 million, which is the amount that is unused. It makes the case with regard to the explanation above, which involves couples who would be better off availing of the standard rate cut-off point for dual income couples where part of one spouse's band at the lower rate is transferred to the other spouse. Taking that into account and the data sources, which it says are different for each data set, the conclusion is that the awareness is pretty high. In my experience, there are people who are entitled to it who are not claiming it. I hope the Minister can give an update to the committee. The purpose of the amendment is really to get a discussion on it because there is a report. However, I am still of the view that there are people who are not claiming it and are not aware of it.
A review of the home carer tax credit was carried out this year by my Department and Revenue following the methodology outlined in the tax expenditure guidelines. The review was carried out to inform future policy making in this area and forms part of my Department’s ongoing commitment to reviewing tax expenditures on a regular basis.
The issue raised by the Deputy was specifically addressed in this report following our discussion of this matter on Committee Stage last year. I hope the report, which is entitled "Review of the Home Carers Tax Credit" and as the Deputy acknowledged, was published on budget day, would meet the needs outlined by the Deputy and that, therefore, he would agree that an additional report is not necessary.
I will deal with the awareness of the credit and progress since we last discussed this issue. The report concludes that awareness of the credit is reasonably high. To further demonstrate this, data from Revenue indicates that around 119,800 families claimed the home carer tax credit in 2017 but only 83,800 families benefited from either the full or partial credit. It is, therefore, not accurate to suggest that people are not aware of their entitlements because there may be genuine reasons, as the Deputy has touched on, as to why they have not been able to or decided not to use the credit. For 2017, the total cost of the home carer tax credit was approximately €83.5 million. As the Deputy indicated, it could be because that potential claimants' entitlement to other tax credits was sufficient to reduce their tax liability to nil without needing to avail of the home carer tax credit.
Although the administration of the tax code is a matter for Revenue, I have been advised that Revenue contacts PAYE taxpayers to remind them that there is a four-year time limit for claiming additional tax credits and reliefs. For example, in 2018, 127,632 letters issued to all PAYE taxpayers who had not claimed additional credits or reliefs from 2014 to 2018 reminding them that they may be entitled to make a claim on or before 31 December 2018. Since this communication, an additional 474 claims were made for the home carer tax credit and I understand that similar letters have been issued by Revenue this year.
Furthermore, as the Deputy will be aware, Revenue pre-populates the annual tax returns of self-assessed taxpayers with the home carer tax credit where it was claimed in the previous year. Revenue also automatically grants the home carer tax credit where it identifies eligible persons whose circumstances indicate that they would benefit from the credit. For these reasons, I am satisfied that everything is already being done to ensure that everyone gets the full value of their tax entitlements and given that a review of the credit has just been conducted, I do not believe there is a need to carry out another report, as the Deputy has suggested. I would ask that he keep this in mind but if he or the committee has further views about what we can do to draw attention to this credit, I would be very happy to hear them and to see if we can engage on it.
Is the reason for the non-take up of the credit by the people identified by the Minister the fact that their income is so low that they are not in a position to avail of the credit? In that context, given that they must be on a very low income, would it not be sensible to look at a refundable tax credit so that they would get a benefit from it?
Revenue has different practices relating to different issues in personal tax cases. For example, if somebody qualifies for a retirement pension, Revenue will very quickly write to that individual to say that he or she may be liable for income tax in the future. Revenue does that relatively quickly because it has a system in place with the Department of Employment Affairs and Social Protection. In respect of potential benefits and also going back to the earlier comments made by the Minister, the Minister spoke about the Irish income tax system being progressive. I agree with him that it is very progressive. The problem is that in Irish society, like many European societies, we now have an awful lot of people on very low minimum wages. These are the people driving around as Deliveroo drivers. These people are really out working but they do not qualify for very much despite being on very low incomes. I know refundable tax credits have been a difficult issue technically for Revenue but I assume that technology in Revenue has moved on and that it would be possible to provide refundable tax credits, particularly in the case of families at work on very low incomes. I am aware of the supports from the Department of Employment Affairs and Social Protection in terms of the payments to working families but these are also potential payments to families and individuals with children or others qualifying under the home carer's tax credit. It is reasonable to look at the technology to see whether it is possible to pay it to people who qualify and for Revenue to initiate that. It may be very difficult for people on very low incomes to generate a claim or they may be a bit frightened of Revenue and are not proactive in seeking to generate a claim. I would be grateful if the Minister could advise us where the thinking in Revenue is going on this issue and whether in terms of the policy developments in his Department, he recognises that certain low-income people miss out on potential tax benefits they could have for a variety of reasons and that we should aim to ensure that those people do receive them. Revenue is very quick when it comes to areas like retirement pensions or second incomes where they are declared and is on to them immediately, which is great. However, it should act as quickly when it comes to people's entitlements.
My point is relevant to Deputy Doherty's point about couples who are not married. The report indicates that there may be merit in an updated re-examination of the legal status of non-married couples. It sets it out in the context of a broader reform because that is relevant as well for couples who are not married and where the transferability of some of the lower-rate band is not there.
I raised it recently by way of a parliamentary question and in his reply the Minister referred to a Supreme Court decision in 1980, the constitutional provision and that Revenue said it would be very difficult administratively to treat such couples in the same way as married couples because of the lack of official documentation in certain cases and so on. The issue is not going to go away. In his response to the committee on the home carer credit, can the Minister set out the broader context of the treatment in respect of the taxation of couples who are not married but are co-habiting?
I welcome the point made by Deputy McGrath. To add to it, I hope that when the Minister clarifies the issues in respect of co-habiting couples that he will also examine, prior to Report Stage, whether an amendment is required to deal with this unfair situation. As Deputy McGrath said, this issue is not going to go away. As we know, more and more people are not getting married and are instead co-habiting. They are, therefore, at a disadvantage.
On the broader point on the lack of uptake and the information available, on most Committee Stage debates on Finance Bills I have said I have huge respect for Revenue and what it does. However, in some cases there is a lack of information. I am conscious that sometimes when more information is provided things can become more confusing. I wish to tease through the home carer credit. Is a person who is married, working part-time, earning less than €7,000 per year and in receipt of child benefit for one child who attends primary school entitled to it?
I will deal with the different questions that have been put to me. I will begin with the shared point made by Deputies McGrath and Doherty on the issue of couples who are co-habiting but are not married. This is the reason I hesitated in giving a fuller answer to Deputy McGrath on an earlier section. I am aware of the legal reasons such couples are treated differently from married couples. I will come back to the committee with a note on this before Report Stage which will outline this further. I do not have the information on why this is the case to hand. I take Deputy McGrath's point that given all of the changes in our society, the nature of families and the composition of parenting, it is likely this will be a more prevalent issue in the future than it has been in our recent past.
On the questions Deputy Burton put to me regarding income and the non-drawdown of the home carer's tax credit, based on the information I have available to me it appears that the drawdown of this tax credit is quite high and it is very plausible that the reasons it is not being drawn down by some is not due to a lack of awareness of the credit. Rather, it is because by the time people check whether the credit would be of use of them they have availed of other credits which means the home carer's credit is of little or no use to them. That relates to the Deputy's second question. I am inclined to think she is right in terms of income and what this means for people's ability to draw down this credit.
Page 18 of the report we published, Review of the Home Carer Credit, indicated that most households availing of the credit only have a single income and the vast majority have an income of less than €60,000, with over one-third having an income of between €20,000 and €40,000. The report breaks down the data by gender and different income levels, which leads me to think, as I outlined in my earlier response, that the key reason it is not being drawn down is that other tax credits have been used up and those who are accessing the credit are on quite low incomes in the first place. By the time they consider whether they should access the home carer credit, it is no longer relevant or beneficial to them.
The Deputy's last point referred to how we deal with those who are on low incomes and the relevance of the tax code to them in terms of supporting them via redistribution. The Deputy is correct. The level of tax paid by citizens who have low incomes is now quite low. The ability of tax to act as a redistributive policy for such people is becoming less and less relevant because the amount of tax they are paying in the first place is becoming lower and lower compared to a number of years ago. In terms of giving support to those citizens, particularly those who are in work, other areas of policy, apart from tax, will be more important, such as the cost of medical and child care and other things with which the Deputy is familiar.
On the question put to me by Deputy Doherty, I will go through the conditions for the home carer tax credit. The married couple or civil partners must be jointly assessed. The home carer must care for one or more dependent persons, and there is a definition of "dependent persons", including a child for whom the person is in receipt of child benefit, a person over the age of 65 or a citizen who is permanently incapacitated. The dependent person cannot include a spouse or civil partner. They must normally reside together for the purposes of tax. To obtain the full credit, the home carer's income must not exceed €7,200 in the tax year and the couple must not claim the increased standard rate band for dual income couples in the year for which they wish to claim the home carer tax credit.
The definition of "permanently incapacitated", either physically or mentally, may not refer to someone who is a child or that the person is in receipt of child benefit. It could be a next-door neighbour. Where are the definitions? They cannot be found on the Revenue website. This throws up some queries. What does "permanently mentally incapacitated" mean? There are different degrees under which that could be argued. Sometimes providing a lot of information can be confusing. I cannot find easily accessible information on this for members of the public who, for example, have an adult living at home. What does it mean when someone is "permanently mentally incapacitated"?
-----in respect of refundable tax credits. I refer to the previous speaker's query. This is a difficult issue.
It is obvious that the poorest families in Ireland are those where everybody is out of work. Those families are also likely to have people with disabilities or medical needs of different kinds. Without a great deal of education and training, the capacity in the family to work is low. Another aspect concerns the high cost of childcare. There have been some small improvements regarding early years education. The Minister spoke earlier, as well as in the budget, about being a centrist. The crisis for centrists in thriving economies is that there is a problem with very low income people at work. Have the Minister or the Revenue Commissioners considered people in that situation, who, to use the words of the Taoiseach, get up in the morning and go out to work? Many people get up in the middle of the night, because they are carers, and then work very hard.
One of the ways to help such families would be to have refundable tax credits. That idea is not without its flaws, but nothing in this system is perfect. Is it possible for the Revenue to do that? What are the Minister's thoughts on that? I ask that because we have people, whom we will discuss later, earning high incomes in receipt of large tax exemptions. We are now talking about small money for people on low incomes and who also have significant home care responsibilities. We do not seem to be able to do anything to make sure that those people get everything in the tax code that can be provided to them.
This is enshrined in the legislation, but this tax credit does not work in the same way as other tax credits. To be fair, the Revenue website is clear that a couple cannot both use the standard rate cut-off point, that is where one spouse uses a portion of the other spouse's share of the band. That also applies to the home carer tax credit and that probably partly explains why we think more people might be entitled to it than is the case. Once an individual's income, let us say the primary earner, exceeds €37,000, the benefit of the home carer tax credit begins to slide. Once income increases to €44,600, there is no benefit from the home care tax credit. It does not work in the same way as most tax credits, such as the case of a jointly-assessed couple where tax liability is calculated and then reduced by the number of applicable tax credits. The home care tax credit does not operate that way and that is not widely understood.
Deputy McGrath is correct. I referred to that point in my own definition of the conditions for the home care tax credit and it is made clear on the website of the Revenue Commissioners.
Turning to Deputy Doherty's question regarding defining "permanently incapacitated by reason of mental or physical infirmity", it is defined, according to the Revenue Commissioners, in practice by the ability or inability of a citizen to maintain themselves or look after themselves. This is clear in the operation of the home care tax credit. In my involvement in debates on the home care tax credit to date, that particular issue has not been identified as a potential reason for the non-drawdown of this tax credit. My expectation is that there is enough clarity regarding what that means because in the many debates on this issue to date, this has not been raised as an issue. It may have been raised, however, with the Deputy The reason for that tends to relate to the issue mentioned by Deputy McGrath. The other issue I have identified and raised is that the income threshold for citizens availing of this tax credit is low compared with the average. This credit, therefore, is not of as much use as we might think when looking at the ability of people to access it.
Regarding the cost of allowing refunds on unused income tax credits, as highlighted by Deputy Burton, this matter has been looked at because it has been called for on several occasions by different working groups involved in this debate on how we support low-income citizens. The last time it was looked at was in 2009. The Revenue Commissioners indicated that the cost of doing this would be approximately €2 billion per annum and I have not been given any reason to expect that figure has changed. The Revenue continues to maintain that there would be considerable difficulties with the technical implementation of this measure.
I am wary for cost reasons alone, and I am also very careful when I am advised that there would be big difficulties in doing something. It is not something I will be proposing to move to in the medium term.
I move amendment No. 3:
In page 7, after line 26, to insert the following: “Report on changes to tax bands for people over 65 years of age
4.The Minister shall, within 3 months of the passing of this Act, prepare and lay before the Oireachtas a report on the potential impacts and costs of increasing the income tax bands for those aged over 65 years of age from the current €36,000 for a couple and €18,000 for singles.”.
This amendment concerns the income tax treatment of older couple. There is a system whereby an exemption limit is in place. For a single person, widowed person or surviving civil partner that limit is €18,000 per annum, while for a married person or a couple in a civil partnership it is €36,000. Until this budget, the previous three budgets of this Government involved changes in the income tax code. Those changes included an increase in the entry to the higher rate of tax and some reductions in the USC, but there were no changes in these annual exemption limits. A couple aged 65 and over, therefore, could be taxed in this way. That would mean no tax because they would be under the exemption limit. The couple could also get what is called marginal relief, which typically only applies if their income is slightly above these limits. If income is significantly above the limits, that couple could then be taxed in the normal.
These thresholds have not changed in the past five years and, therefore, more older couples are moving away from that exemption limit system of being taxed to being taxed in the normal way. This is the final budget of this Government and the purpose of this amendment is to have a debate on whether the Minister believes this issue needs to be reviewed. Three budgets in a row have resulted in changes to income tax and the USC. There have been no changes in the tax treatment of older couples, however, and the issue should be discussed.
We discussed this on Committee Stage last year. I remain satisfied that the current limits are appropriate. In 2017, this measure benefited 80,500 taxpayer units. Little evidence is currently available to indicate that the current exemption limits are causing any undue financial hardship for those aged over 65. Deputy McGrath may have different evidence, to which he will no doubt refer if he has it. Age exemption is only one of the many types of relief available to those of retirement age. Those aged over 66 are exempt from employees' pay related social insurance, PRSI, while those aged over 70 benefit from a reduced rate of USC. Other income tax credits may also be available, depending on the personal circumstances of the individual. Those may include the personal tax credit, credits for widows or widowers, blind individuals, those caring for incapacitated children or dependent relatives and for health expenses incurred by the taxpayer.
These apply in addition to the various expenditure measures that give support to those aged over 65, including the State pension and the free travel pass. At current levels, the age exemption has an Exchequer cost of €79.7 million per annum. Even a modest increase to the limits would come with a significant cost. For example, it is estimated that an increase of €1,000 for individuals and a €2,000 increase for couples would cost an additional €36.6 million in a full year. Any consideration of such changes would need to be cognisant of the significant demographic changes projected to happen in the future.
For example, it is estimated that the share of the population aged 66 years and over will more than double between 2016 and 2071, while life expectancy rates are set to increase by six years for males and seven for females. As a result, even without making additional changes such as the ones the Deputy is considering, there will be significant pressure on the Exchequer to fund expenditure in areas such health and social welfare. Therefore, it is my view that the current income exemption limits are reasonable and continue to represent the appropriate use of limited resources, taking account of the various other State supports for the over-65s. For that reason, I do not propose to accept the amendment. If there are particular matters or items on which the Deputy wants further information or to have costed, I will make it available to him, as I would to any other committee member.
I move amendment No. 4:
In page 8, line 3, to delete "€1,500" and substitute "€1,650".
This amendment relates to the earned tax credit for the self-employed. The policy objective of the Government and Sinn Féin is the same, if we are to take as read what the Government stated in the programme for Government that it would end the anomaly whereby the self-employed were unable to avail of the tax credit of €1,650 availed of by PAYE workers. The anomaly was supposed to be ended a number of years ago. We have been making progress towards that end and in this Finance Bill the Minister has suggested the tax credit be increased to €1,500 from the current level of €1,350. As the Minister will be aware, to equalise it with the tax credit availed of by PAYE workers, it needs to be increased to €1,650. It is appropriate in the last year the Government will bring forward a finance Bill in the current Dáil that the commitment given be honoured. My party is merely facilitating the Minister in honouring his own commitment by placing the amendment before the committee today. I am interested in knowing why it was not ruled out of order, given that other ones were, but we will come back to that issue later when we deal with amendment No. 22.
As I was looking at the amendment, the same question crossed my mind. I thank the Deputy for offering such forbearance and an opportunity to me to change the budget, but I will explain why I am not in a position to accept his amendment.
In this Finance Bill I have provided for an increase of €150 in the earned income credit to bring it to a value of €1,500 per year. It is estimated that the credit will be of benefit to approximately 217,400 cases in 2020. In view of the particularly limited resources available to me in budget 2020, it was not possible to increase the earned income credit by €300 to €1,650 as proposed by the Deputy. Such an increase would cost €40 million in 2020, as compared to the €20 million first year cost of the €150 increase which was achievable within the resources available to me. It would also give a disproportionate benefit from the budget, if we were to go down the route proposed by the Deputy, to the self-employed as compared to all other individuals, including PAYE workers, pensioners and welfare recipients.
I accept that differences remain in the taxation of employees and the self-employed. However, it is the case that some of these differences are to the benefit of the self-employed. For instance, the self-employed continue to benefit from a broader expenses deduction regime than employees. There are also significant timing benefits in the payment of tax liabilities which are available to the self-assessed but not to PAYE workers, depending on the accounting period used by the taxpayer. Deputies will also be aware that the overall contribution to the Social Insurance Fund by the self-employed is significantly less than that of employees as no equivalent of the employee PRSI contribution is payable.
I am aware of the commitment to increase the earned income credit to €1,650 by 2018. However, the different constraints I had to consider and also the fact that I had made so few other personal tax changes in the budget meant that bringing the credit to €1,500 was as far as resources would allow me to go and also as far as I felt it was appropriate to go in the context of other changes I was not in a position to make.
As I said, the Minister committed to delivering on this commitment of the Government two years ago. It is right and appropriate that the self-employed be treated fairly and equally with PAYE workers. I will be pressing the amendment. The Minister stated the change would give an increased advantage to the self-employed over PAYE workers. When we come to subsequent sections we will deal with issues where a real advantage was given. The cost of the proposed change would be €40 million, but the special assignee relief programme, SARP, costs far more than that sum. The additional advantage under the SARP, as a result of the Minister's decision to extend it, is not an extra €150 as it would be under the amendment but €123,000 for at least 12 individuals with earnings above €1 million, eight of whom have earnings above €3 million. If we are talking about a disproportionate advantage from the budget, we know where the Minister's priorities lie. This is a commitment that was given and it should have been delivered on. I am pressing the amendment.
Before proceeding with the discussion on section 5, we can address the matter raised earlier by Deputy Pearse Doherty. I propose that we write to the Ceann Comhairle to clarify how amendment No. 4 is in accordance with Standing Order 179 while amendment No. 22 has been ruled out under Standing Order 178 and if he will consider these implications. We will ask for clarification and bring the response when we have it from the Ceann Comhairle.
This relates to the special assignee relief programme, SARP. The Minister proposes to extend this programme, which was due to run out at the end of the year, for a further two years. It provides a relief of 30% of income for tax consideration for individuals who are assigned within their companies from abroad to take positions in Irish-based operations of their employer or in an associated company. The individual must have an income of at least €75,000, with an income tax relief applied on the salary above €75,000, with an upper threshold of €1 million for the tax year of 2019. In effect, this means somebody earning €1 million would be €123,000 better off as a result of the continuation of this scheme. That would apply to a person who will work here in 2020 and falls into this category.
The number of people applying for this has increased and the cost of the scheme has also increased. The year after it started the cost was €1.9 million but, in 2017, the cost was €28.1 million.
The number of employees availing of this is now 1,084. The serious questions must be asked. We had a discussion earlier about support for families with low joint incomes which have, in some cases, people with mental and physical incapacity. They may not have much support available. On the other hand, in 2018, eight individuals earning more than €3 million benefitted from this scheme, and that benefit amounted to €123,000. A total of 23 other individuals earning between €1 million and €3 million benefitted from the scheme.
This speaks clearly to the priorities of the Government. It talks about a tax giveaway and the Minister has just voted against his own programme for Government commitment that would cost an additional €20 million. In 2017, this scheme cost €28.1 million and that is likely to have increased in 2018 and 2019 and again in 2020. This is a major tax break for some of the wealthiest people in society and it should not be justified. I ask the Minister to drop this ill-advised scheme. It is completely unfair when people are out there trying to get by week by week. They are feeling the pressure of everything around them, whether it is the cost of insurance, rent or other living expenses. This scheme is for individuals coming from abroad who have special roles within companies and they can write off nearly a third of their income above €75,000 up to €1 million for tax purposes. It is not acceptable.
The scheme goes further and there are other issues with respect to private tuition fees, etc. I am completely opposed to it at a time many other supports are required. The Minister announced an additional €2 million for people with autism in the budget. I have experience of talking to people who are trying to navigate a system that is simply not working and that does not respond to their needs or the needs of their children or families. The Government has provided €2 million to support all those children with autism and their families or to try to increase services. Meanwhile it is providing €40 million or perhaps more for the people in this scheme, some of whom are millionaires or multimillionaires. They will get up to €123,000 in tax benefit next year as a result of this section in the budget. It is not acceptable.
I thank Deputy Doherty for his contribution. I have conducted a review of the SARP scheme. As he will be aware, I have put in place a cap of €1 million for new applicants, which will apply to all applicants from 1 January 2020. I have put in place such a cap driven by my own concerns to ensure we have the right balance between schemes that reward people on a high income and the benefits those individuals bring to the rest of our economy.
I will say a word about those on high incomes and then a word about the benefits that are brought to the rest of our economy. On a number of occasions, the Deputy made reference to the fact that somebody on €1 million would have a reduction in income tax that is payable of €111,000. This is the figure supplied to me by the Revenue Commissioners. What the Deputy did not go on to acknowledge is the other part of the equation, which is that the individual on €1 million would pay income tax and USC of €355,511. The Deputy is correct that he or she would pay less tax but he or she would still pay an effective tax rate on €1 million of 35.55%. I have introduced the cap of €1 million for new applicants and all applicants from 1 January 2020 precisely to address the concerns I had regarding the benefit that could be made available to some, particularly those on a high income.
I will now deal with the broader rationale for the scheme because it is not to deliver benefits to those already well paid and, in some cases, very well paid. The rationale for the scheme is that it provides one of the tools we need to ensure Ireland is able to get a particular form of investment from particular companies located in Ireland. If I look at what those benefits are, the report I commissioned last year and made publicly available drove the Report Stage amendment on which I just commented.
Last year the companies in which these individuals work employed over 155,000 individuals and paid over €1.9 billion in PAYE taxes and over €2.5 million in corporation tax. They are the wider benefits the scheme has been put in place to address. The cold reality I face is that the scheme has to stand up against the fact that other countries in Europe have even more favourable schemes, the purpose of which is to attract individuals and then the companies which are located and providing employment in Ireland. Concrete examples are France, the Netherlands, Italy, Portugal and Malta where there is a similar scheme in place. The scheme in place in France offers a deduction of between 30% and 50% of total income. Under the Dutch scheme there is a minimum salary threshold of €37,000 and it provides the employee with a 30% tax-free allowance. The Portuguese scheme for qualified non-resident professionals offers a 30% reduction in the income tax rate. Many other open economies, small and large, have schemes such as this in place. The reason we have ours is to attract individuals who other companies are looking to attract in order that they will be located in Ireland in order to provide the tax revenue that will allow us to make progress in dealing with the issues that really matter to citizens and society.
The Deputy made reference to a personal experience with autism services. In my constituency I have had a lot of experience of the effect access to autism services can have on citizens. The sum of €2 million is provided to draw up an autism strategy. We are spending significant amounts of taxpayers' money to ensure we will have the supports and public services needed for families and, in particular, young boys and girls with autism. To do this, we need tax revenue. This is part of what we do to allow us to be competitive against other countries which have similar or more lucrative schemes to ours.
I do not want to diverge into a debate on autism services. Any parent of a child with autism will say he or she needs access to services. The Minister for Finance could have announced a significant amount of funding for services to be delivered to children and adults with autism, but it was not provided. Instead, he announced a sum of €2 million for a strategy that might or might not be followed by services in the future. He also announced a tax scheme that would not be in place in 2020 but which will, as a result of section 8 of the Bill, confer in some circumstances a benefit of €111,000 to multimillionaires. That is not fair. A teenager with autism in my community will say it is not fair. Any parent who is struggling to find a school placement will say it is not fair, as will any parent or teacher who cannot obtain a diagnosis for a child who has all of the traits of autism. I accept that the people in question will pay tax, but that does not take away from the fact that we will all vote on this measure, although some may abstain, to confer a benefit of €111,000 which others will not gain. A person who is working flat out or running his or her own company and earning good money will not get it as it is only for foreign employees who will come here under a specially assigned programme. The argument is that it is about creating jobs, but let us look at the facts which speak loudly. The 1,084 people who availed of this benefit in 2017 had to state in their tax returns how many jobs had been created as a result of this €28.1 million tax giveaway. How many jobs did they or their companies create as a result of it? The figure was an 383 additional jobs. This figure cannot be verified, but it is what the companies are telling Revenue. It represents a cost of €78,000 per job. If we think that is good value for money in job creation, we have got bigger problems than this scheme.
The question is about fairness in the tax code and this is not fair. The scheme is costing us a fortune and the cost is increasing rapidly each year, going from €1.9 million in 2013 to €5.9 million in 2014 and nearly doubling again in 2015 to €9.5 million. It doubled again in 2016 to €18.1 million and went up by another €10 million in 2017 to €28.1 million. We do not yet have the figures for 2018 and 2019, but if they follow this trend, the figure for this year is likely to be between €40 million and €50 million. If it follows the same trend next year, it could be anything up to €100 million. Fine Gael and Fianna Fáil, the members of which will support the Minister, may believe that somewhere, somehow, 31 individuals earning €1 million should benefit by €111,000 as a tax bonus in this Finance Bill. The Minister may argue that the eight individuals who earned in excess of €3 million in 2017 are so hard done by that they need this committee and Parliament to give them that extra bonus. I do not. It is wrong and appalling, given all of the challenges people face and the lack of resources in certain key sectors.
Today there are close to 700 patients on trolleys. It is crazy that patients who are vulnerable and in need of treatment are lying on trolleys in hospitals while we are putting resources into this scheme. That is not fair and it is our job to call it out. Not many people know about the scheme, but it is appalling and should be ended. It was supposed to end. The Finance Act states it is to finish at the end of this year. However, it is not going to finish because the Minister is going to keep giving the benefit and I am sure Fianna Fáil will give it too. I am sure some members who have not even been following this debate will come in when we call a vote and push the button to award this benefit. They may not know that people could be watching this debate and telling themselves that they will be €111,000 better off as a result of a decision the finance committee will take in the next few minutes. Some of them will not receive that amount, but there are up to 1,000 people who may qualify. Many of them are wondering whether they will receive it, while everybody else, stuck at home, is paying tax at a rate of 40% above €35,000. The individuals targeted by the scheme can reduce their tax liability by waiving 30% of the income they earn between €75,000 and €1 million.
I feel very strongly about this issue which I will push to a vote, having argued about it every way I can in the past few years. It speaks volumes about Fine Gael. Who has the ears of the Government? It is not the kids I see or the parents who come to my constituency clinic. The Minister will say nobody has a monopoly of empathy and I know that he is empathetic.
If only those parents had access to the people who designed this section of the Bill and have given this amount of money to the individuals in question, but they do not. The people concerned waltz in and out of Government Buildings. They are the tax accountants who are telling the Minister that this provision is needed. Why is it needed? They are saying it is needed because 383 additional jobs were created as a result of this €28 million tax break, but the figure has actually dropped. The number of additional jobs created under the scheme dropped by 90 between 2016 and 2017, while, at the same time, the amount of money we had to give the individuals in question went up by €10 million. Communities are crying out for investment. If there was anything near this level of investment, they would create 383 jobs in the morning.
I oppose this section. As Deputy Pearse Doherty outlined, it is a really blatant pro-super rich policy by the Government to hand over the money in the form of a tax break to some of the highest earners in society. Those affected will not have to pay up to €130,000 in tax next year, a sum they would have had to pay prior to the budget. The money could have been spent on many things that we need in our society. It could have been spent on public transport, healthcare services, education services or housing, but instead the Government is making a political choice to give it to people who already earn €1 million gross per year. The Minister says we have a great, progressive tax system, but that can only be claimed in looking through a very narrow lens at income tax revenue. How can he justify this tax giveaway or tax expenditure for those who are earning huge amounts of money? What have they done to deserve it? Why do they deserve it more than low paid workers who are still paying USC or those who are awaiting treatment in the health system? Why do they deserve it more than those whose children with special needs are awaiting appropriate services and care? It is disgustingt is a political choice made by the Government to benefit the very highest earners, but there is simply no justification for it and it is scandalous that Fianna Fáil is going along with it.
It comes down to whether one believes the scheme makes a difference. If one believes ending it would not have an adverse impact on Ireland's FDI offering, of course, one would abolish it. If one felt it would make no difference to the 156,000 jobs in the companies that have SARP employees, one would take the view expressed by Deputy Paul Murphy. The companies in question paid €2.5 billion in corporation tax and almost €2 billion in PAYE contributions. The scheme was independently assessed by Indecon which produced a very detailed report which made a recommendation following a cost benefit analysis. One can criticise that analysis or question the assumptions made, but the conclusion was that the benefit of the scheme exceeded the cost. IDA Ireland which Deputies here are very quick to praise when it suits them is strongly of the view that a scheme such as SARP has a role to play. It is part of our offering in attracting foreign direct investment. The landscape is very competitive, as we all appreciate. The question is whether one believes all of the jobs we have attracted through our FDI offering and all of the investment we continue to secure would continue to be attracted and secured and that the scheme plays no role whatsoever in that regard. I do not take that view and believe the scheme does play a role. It might not sit comfortably with any of us that it is part of our FDI offering, but the reality is that it is. Such a scheme is also part of the offering of many of the countries with which we are competing for foreign direct investment. That is the fact of the matter. It is for those reasons that Fianna Fáil supports the retention of the SARP.
I wish to come in again to respond to some of the charges made. Deputies have described the reality for families they know and represent who are looking for better services and need support for their children or other family members who have great needs. I feel the same way in wanting to make progress to ensure those families and citizens will receive the support they need and deserve. I want to see the same happen. The world in which I live also involves travelling abroad with IDA Ireland to other countries that have schemes such as this. When I meet representatives of other governments, I am made aware that they want the companies we are discussing that provide employment in Ireland to be located in their countries. I cannot wish away that reality. It is the reality in which this country trades and within which we try to attract investment and generate income which we then use to fund the public services we need.
I wish to respond to the point about autism services made by Deputy Pearse Doherty because while it is anchored in personal and constituency experience which I understand and respect, I will not allow the Deputy to create the impression that all the Government did in budget 2020 was invest €2 million in autism services because he knows that the Departments of Health and Education and Skills provide many multiples of that amount to employ staff to provide the public services citizens who are dealing with the challenge of autism need. He knows that happens. I will not allow a comparison to be made between this scheme and the figure of €2 million when the reality is that multiples of that figure are being provided to support citizens with autism and their families.
Deputy Pearse Doherty understands the role of foreign direct investment in the economy and how valuable it is, but all Deputy Paul Murphy wants to do is nationalise it because he is opposed to that kind of investment in this country. In that sense, it does not surprise me that he is against a scheme like this. However, if I was to make a policy decision that resulted in international investment or companies located in Ireland moving elsewhere, the Deputies would be the first to lambaste me for the flight of jobs or investment from the economy. They can have it both ways, but I cannot. The reality is that other countries offer schemes such as this.
Deputy Pearse Doherty referred to the creation of an extra 383 jobs, but he did not refer to the number of jobs retained - 839 - which makes a big difference to the equation. None of the Deputies supporting the amendment has referred to the fact that the companies for which these employees work are huge payers of income tax and corporation tax. Every time Deputy Pearse Doherty quotes the benefit of €110,000 delivered under the scheme, he should also quote the €355,000 paid in tax. The reality that if this scheme was not in place, it is likely that that €355,000 would be paid in tax in another country and that the jobs associated with the scheme would be located elsewhere. I want to have them here in order that Irish citizens can benefit and the tax revenue raised from this investment can be used to fund better public services.
I did not make an issue of the 839 jobs retained by the companies involved because they are not the individuals who are availing of the relief under the SARP in the first place. If one looks at the form, one will see that there are two requirements to be in providing data for Revenue. The first concerns the number of jobs created as a result of the operation of the SARP. I will read it for the Minister. The form refers to the number of employees in the company as a result of the operation of the SARP. The increase in the number of jobs is 383.
That is an increase of 383. An asterisk notes that this does not include any of the employees who availed of SARP relief. The second figure is the number of employees retained by the company as a result of the operation of SARP relief. This figure does not have the same requirement. Let us be clear. The asterisk indicates that this information is a required field and it is necessary for the preparation of the annual report. As the Minister knows, these individuals claim SARP relief for a period of up to five years. They are therefore the same individuals.
These are not all new jobs. The companies themselves provide these figures. There is no real audit suggesting that this has been checked. Deputy McGrath can offer a great defence of this scheme based on multinational companies, outlining an Armageddon scenario in which we lose hundreds of thousands of jobs. However, the companies themselves say that this scheme has increased the number of jobs in all of these firms by just 383. Only 839 jobs have been retained, and this figure can include the individuals who avail of SARP. SARP was availed of by 1,084 individuals during that period.
As I said, I will not get into a debate on autism services, but the Minister is completely and utterly wrong. There is no additional line item providing for autism services. I can take him to west Donegal. Where is the local home support liaison? There has not been one there for years because of budget cuts, decisions the Minister made. As I say every time, this is not personal. Deputy Donohoe holds the office of the Minister for Finance and he makes these decisions. This is one of the decisions he is making and I do not agree with it. It is pathetic, wrong and appalling. So much more can be done and so many other needs come ahead of the eight individuals who earned more than €3 million and will get a €111,000 tax cut as a result of this section. However, the Minister has made this decision and he must wear it and justify it. I ask him not to do that by suggesting that these companies will all flee if he does otherwise. They are not suggesting that at all; they are not saying this scheme is needed to retain thousands of jobs. They say it is needed to retain 839 jobs. As I said, some of the 1,084 people who availed of SARP last year are the same people who availed of it the year before.
Those jobs are being retained as a result of SARP. One could argue that they are needed in the companies concerned. They are in key areas. Deputy Joan Burton was Tánaiste when this was introduced. At the time it was claimed that 20 additional jobs would be created for every job supported by SARP. That is on the Dáil record. That would mean that the forms the companies submitted to the Revenue in 2007 should have indicated a year-on-year increase in the number of employees of more than 20,000, not 383.
Yes, the Indecon report has made recommendations and there is now a €1 million limit. However it still comes down to brass tacks. Is this the best thing we can do? The Members here will have to go back to their constituencies. Can the Minister justify to the next family that comes to his constituency office his decision to give a tax benefit of €111,000 to people who in some cases are multimillionaires instead of investing in services needed by these parents and children? I would not be able to do that.
I have to justify the choices I make to my constituents, as Deputy Doherty does. I will do so. I conclude by noting again that the Deputy is quoting a figure of €111,000. Let us also quote the €355,000 of tax paid by the same individual, an individual who might not have been in this country if a scheme like this was not in place. It is a scheme that many other countries have. Let us also quote the figure of 155,000 people who are employed in companies in which the SARP scheme makes a difference.
Throughout this period, Ireland's share of international investment and employment has continued to prosper. I am not for a moment arguing that the SARP scheme is the sole reason for this. I am making the case that these are jobs of a particular type which other countries also want to attract. In order to get those jobs we have to be competitive. We benefit from additional tax revenue by attracting those jobs.
I move amendment No. 5:
In page 11, to delete lines 16 to 21 and substitute the following: “company, and
(b) whose business consists wholly or mainly of the holding of shares only in the following (and no other companies), namely, its qualifying subsidiary or subsidiaries and where it has a relevant subsidiary or subsidiaries, in that subsidiary or in each of them;”,”.
The amendments concern the proposed changes to the key employee engagement programme, KEEP. I will speak initially to amendments Nos. 5 and 6, which are linked. The intention of the provisions in the Finance Bill is to open the scheme to group structures, whereby an individual employee could work in various companies within the group structure. The definition of a qualifying holding company, however, stipulates that the holding company must not carry on a trade or trades, which is the issue I seek to tease out, given that the provision does not reflect the commercial reality that in many cases holding companies do carry on trades. It could happen, for example, that an SME group grows organically, and the company carries on a trade and sets up a subsidiary to do so in Britain or Northern Ireland to expand its business into new lines of activity. Why should this disqualify the holding company and the wider group from relief under the KEEP scheme if the group's activities are eligible within the framework of the relief? What would be the unintended consequences if the restriction was removed from the definition? For example, would there be a cost to the Exchequer?
I turn to amendments Nos. 7 to 9, inclusive. The Bill as initiated disqualifies a company from the relief where it fails to submit the prescribed report with details on KEEP options and shares allotted, for example, by 31 March in the year following the relevant chargeable period. It seems unduly harsh that a company and its employees could be automatically disqualified from the relief in circumstances where, for example, a filing is made a day or two late. KEEP is a more complex scheme than most and, if we are to encourage SMEs to use the scheme, the penalty should be proportionate. Accordingly, I propose that "may" will be substituted for "shall". It is especially relevant when considering the cohort of companies, such as SMEs, that is intended to be within the scope of the measures. Replacing "shall" with "may" will give Revenue the ability to disqualify the company or group for consistent non-compliance, a power it should have. The obligations for reporting placed on a company operating KEEP are more onerous than the obligations on those operating an approved profit-sharing scheme or a save-as-you-earn scheme. The adjustment, if amendment No. 9 is accepted, will be proportionate.
On page 11, lines 18 to 21, inclusive, a new test is established for a qualifying holding company, namely, as a company "whose business consists wholly or mainly of the holding of shares only in the following (and no other companies), namely, its qualifying subsidiary or subsidiaries and where it has a relevant subsidiary or subsidiaries, in that subsidiary or in each of them". There is confusion over the precise meaning of the test and how it will work in practice. We have proposed the amendments to require the Minister or the Revenue to come forward with guidance on the provision. The KEEP scheme is complex enough, and the background is that just 87 employees have been in a position to avail of it until now. We should avoid, therefore, any steps that would further complicate it.
Amendment No. 9 is redundant, given that the other amendments have not been ruled out of order. It was tabled in case amendments Nos. 5 to 8, inclusive, were ruled out of order but they have not been.
Amendments Nos. 5 and 6 would have the effect of removing the restriction on a qualifying holding company in respect of the carrying on of a trade or trades. The Finance Bill 2019 provides for significant broadening of the types of companies and structures that may avail of the KEEP and increases the scope of activities that may be carried out by a qualifying holding company, including management functions for the companies within the qualifying group. The intention behind the changes being introduced is to ensure that the types of companies that are provided for under the legislation reflect commercial reality. The amended definition of a holding company, as included in the Bill, was on the basis of policy formed in response to a comprehensive SME public consultation process which took place in May and June of this year. The specific policy of including companies where there is trading activity within the holding company was not presented to my officials as an essential change required by the majority of SMEs as part of this comprehensive stakeholder engagement.
On the point the Deputy raised, the definition we have of a holding company is one that met the needs of the majority of companies that were involved in this process with us and which the Revenue Commissioners and my Department considered appropriate to implement. We are not aware of a policy need or demand to change it further. The Deputy might offer different views on that and between now and Report Stage we can listen to those views. In any event, if a company wishes to grant share options under the KEEP, and this comment is in reference to amendment No. 6, it must ensure that they come within the requirements of the scheme. The amendments I am bringing forward will facilitate greater numbers of companies in this regard.
I do not believe it is an especially onerous imposition on a company which is seeking to avail of a valuable relief such as KEEP. That is the reason I believe, with regard to amendment No. 7, it is appropriate to keep the word "shall". If we are making an expanded scheme available to a greater variety of companies, there should not be any ambiguity regarding the requirements that must be met for the scheme to be made available and for the Revenue Commissioners to be satisfied that those requirements are being met. For that reason, it is important that we retain the word "shall" as opposed to "may". My experience of similar changes in the past is that we can change it to "may" at some point, or one might decide it should be "may", but we find at a later point that there are difficulties with companies that are participating in the scheme and companies which subjectively feel they may be entitled to be in the scheme. We need that to be objectively the case and we rely on the Revenue Commissioners and records that are supplied to the Revenue Commissioners to make that determination.
Amendment No. 7 proposes that a company might continue to be regarded by the Revenue Commissioners as a qualifying company where the company fails to comply with the annual filing requirements. It must be remembered that KEEP operates on a self-assessment basis with no Revenue Commissioners pre-approval required, so the strict filing requirement is key to ensuring timely returns are made to the Revenue Commissioners. I do not believe that is too much to ask, given the valuable nature of the relief. This also ensures that the requirements on us to demonstrate our compliance with state aid obligations can be fulfilled. For this reason I do not intend to accept the amendment. I ask the Deputy to reflect on the rationale I have put forward for that.
With regard to amendment No. 8, the amended definition of a qualifying holding company has been drafted in such a way as to allow certain flexibility in terms of holding company activities. The change was requested by companies and I am happy to oblige. I believe that the "wholly or mainly" test is not in any way an onerous one for KEEP companies to meet. Indeed, it should be noted that this does not reflect any policy change in this regard and it provides ample scope for qualifying holding companies. Revenue Commissioners guidance notes, and the Deputy mentioned this, will be updated setting out further information relating to the amended definition of a qualifying holding company. I am informed by the Revenue Commissioners that they intend to issue this guidance by the end of this year.
As regards the Deputy's request for a report on the practical operability of KEEP in amendment No. 9, I remind him that as part of the preparations for budget 2020 officials from the tax division of my Department undertook a stakeholder consultation process on tax incentives for SMEs. This included the KEEP. We received 17 responses and upon analysis of the submissions, my officials identified common themes and established a shortlist of the key issues for discussion at the follow-up event. The changes we made were based on that process. The Deputy pointed out to me on a number of occasions, and it was a valid point, that not enough companies were accessing this scheme and that, in particular, small and medium sized companies were unable to benefit from it. We carried out two different consultation events on it. Those events and reference to this scheme in the tax strategy group papers motivated us to make the changes we have made here. Our judgment is that once we gain state aid approval for these changes, as we will be required to do, they will have a significant effect on the number of companies that will be able to access this scheme.
I have some general questions on the KEEP. Does the Minister not agree there is a danger in incentivising key employees to be paid with share options in terms of the dynamic that it creates in the incentives for the employees? A factor cited in the crash of 2007 and 2008 was the impact of that incentive, which was not so much to achieve long-term sustainable growth, but to achieve increases in share prices in the short term. Second, am I right that the maximum benefit one can get from this in a year is €100,000 worth of share options and €250,000 worth over three years? Perhaps the Minister will provide clarity on that. What happens if one gets more than that amount of share options?
Will the Minister clarify the state aid issue? Has approval been sought yet? How long does that typically take? Will it only start after we have passed the Bill? I welcome the fact that the Revenue Commissioners will issue updated guidance notes. As the transcript of today's proceedings might not be online before we have to decide whether to table Report Stage amendments, will the Minister share the notes he has quoted from with the committee? We might not have the transcript online in the next few days in advance of the Report Stage deadline and I wish to reflect on what he has said. However, if he will deal with the state aid issue, I will be satisfied with that for now.
We must apply for state aid clearance. We will not begin the process of applying until the Bill is passed by the Oireachtas. We anticipate that it will take four to six months to get approval from the Commission. Of course, this is an independent decision made by the Commission and we will have to engage with it on it. I will share my note. I will ensure that the committee's secretariat is given a copy of my speaking notes and the Deputy can then reflect on them.
As I understand it, Deputy Paul Murphy's question is whether the operation of a scheme like this could act as a catalyst to the growth of share option schemes. My judgment on the matter is that the key catalyst in place is the fact that we have so many larger companies located here which already have very generous share option schemes in place. That is the catalyst to the availability of share option schemes in smaller companies, not the availability of a scheme like this one. The catalyst is that larger employers are competing for the staff of small companies. If a company has the ambition to float at some point, it uses that as an incentive to be competitive with large employers that are here.
On the Deputy's question regarding the caps in place, the total market value of all schemes does not exceed €100,000 in any one year of assessment or €300,000 in all years of assessment. Any shares that are granted beyond those caps would not receive a benefit from the scheme. It has been highlighted to me that there is a third criterion here, namely the amount of annual emoluments of the qualifying individual in the year of assessment in which the qualifying share option is granted.
I do not agree with the proposal in section 15 to extend the scheme, which was due to expire. I am against the extension for a number of reasons and have some questions to put to the Minister. I am against it because the fundamental effect of the so-called "help-to-buy" scheme is to transfer money into the pockets of developers having passed through the hands, briefly, of a select group of potential first-time buyers. The scheme was introduced originally on foot of significant lobbying by the CIF and it appears there was also significant lobbying in favour of its extension. The Minister might be able to tell us more about that. The scheme is being continued with no additional rules, albeit those were speculated about in the media.
Does the Minister have any evidence that the scheme works? In Britain, a similar scheme is being wound down on the back of studies that show there is massive dead weight in it. The people who are getting the money from the help-to-buy scheme would have been able to buy in any case and they are still buying the same kinds of houses without the scheme. It is an expenditure that provides no benefit whatsoever for the State. Ordinary workers on the average industrial wage cannot access the help-to-buy scheme in the first instance. I do not see the economic rationale for the scheme and the money would be far better spent directly by the State to build houses. I am interested to know whether the Government has carried out any study similar to the study carried out in Britain, which concluded that there was a very substantial dead weight in the scheme resulting in the decision to wind it down there.
We have not carried out any study beyond the study and information I published as part of budget 2019. I have retained the scheme because it provides important help for people who are looking to buy their first home in particular. On the view that could be created that the scheme looks in some way to support developers or the purchase of valuable home, the average house purchase price available under the scheme tell a very clear story in this regard. If one looks at the purchases properties with the assistance of the scheme, approximately 56% were priced between €226,000 and €375,000. These are houses that people typically seek to buy as their first homes and I want to have measures in place that help low and middle-income citizens to do that. It has been a standard feature of tax codes to have such supports available. The scheme is providing a valuable support to those looking to buy their first home and is merited for a further period.
The amendment is technical in that it addresses an error in the original drafting of the section. As announced in my Budget Statement, the section extends the help-to-buy incentive by 24 months to 31 December 2021. In extending the scheme for two more years, Revenue included a new formula of words to determine the tax look-back for applicants. The amendment removes the proposed new section 477C(7)(c) from section 15 as it runs the risk of reducing the relief available for many applicants. The current draft set out in the Bill means an applicant in 2020 will not be able to rely on the 2019 tax for relief. Revenue's intention was to align applications with the annual tax return cycle and the consequences of the change were not fully appreciated at that time. Revenue believes the existing text would be sufficient to ensure the relief allows applicants to continue to avail of their tax in the year immediately prior to the application for claims in 2020 and 2021.
We are going to spend another €100 million on this tax expenditure without carrying out a study to show it will result in any ordinary people getting houses. That is the proposal notwithstanding the fact that a study of a similar scheme in Britain has concluded there is a massive dead weight and it is a waste of public money. When the then Minister for Finance, Deputy Noonan, introduced the scheme, he was very open that it was about propping up property prices. He commented openly in the media that it was about increasing property prices and, thereby, incentivising the construction sector to get involved in building these houses. The Minister may think or argue that his final purpose is to allow people to access homes, but part of the logic of the scheme, or an intermediate point at the very least, is to prop up property prices to incentivise developers to build homes.
Is that not the Minister's purpose?
Third, I have found records of lobbying engagements with the CIF for the continuation of the help-to-buy scheme. How many lobbying engagements, meetings, communications have occurred between the CIF and the Department on the scheme over the past year?
Finally, does the Minister accept that the house prices to which he refers, in excess of €300,000, are out of the range of two workers on a median wage of €30,000, that is, a combined income of €60,000? They simply will not be able to buy a house in that range. The scheme does not work. A cohort of workers who would like to access the housing market are unable to do so, but even if they could, does the Minister accept that a far simpler and more effective way of using public money is to use it to build public housing?
We opposed this scheme from day one. We were told that it was about increasing supply. I do not know how increasing demand at a time here is no supply will increase supply. It has pushed up house prices. We see this from the analysis. We should remember that the €20,000 that has been collected from some taxpayers has been put into the pockets of other taxpayers. Some 21% of those who claimed this amount were for purchases of properties in excess of €375,000. That is very much at the upper end of income distribution in this State. A person would need a household income of €96,000 to purchase a property at that price, and that is not the income most households earn. We can see from the analysis undertaken by the Parliamentary Budget Office that more than one fifth of the subsidy goes to the upper end. It is grand for the Minister to make statements but the facts do not stack up. A large portion of the €100 million tax break goes to individuals who are purchasing property and who do not need this tax break to get a mortgage to purchase a home. Does the Minister accept that? Does he further accept that it is clear from the figures that a significant amount is going into the pockets of individuals who do not need the money to purchase a home because 41% of them are able to get a mortgage with a loan-to-value ratio of less than 85%? A direct line cannot be drawn that 41% is equal to €41 million but I strongly those who can meet a loan-to-value ratio at that level are likely to be in the higher income brackets, given the prices of property at this point. Does the Minister accept that 41% of successful applications are going to individuals who do not need the money to purchase a property in the first instance?
I will deal with Deputy Paul Murphy's points first. The reason I am not commissioning a further study into a decision I have made is that I have had two studies on it, the latest of which was undertaken 12 months ago for last year's budget. I published it and all the information relating to it.
On lobbying, I had one meeting with the CIF at which there was no reference to the help-to-buy scheme. I met its representatives and they did not bring it up.
There is no information available to me on the income levels of people who access the scheme. I have other forms of information but a key dataset that I use is the value of homes that are purchased under this scheme. While I made the point that 56% of the homes are valued at between €226,000 and €375,000, 13% of properties purchased with help from this scheme have a value of less than €225,000. It is fair to assume that those properties, particularly if they are in the larger cities, are first homes or perhaps family homes that have been purchased by people who need support because of their income level.
Deputy Doherty made a point about the loan-to-value ratio and asked me to confirm that 41% of approved claims were made by households which have a loan-to-value ratio of less than 85%. Those are the figures and that is correct. However, just because there is a loan-to-value ratio for those people of less than 85%, that does not also mean that a degree of support will not be a help to them. Many other purchases are going ahead that have a loan-to-value ratio higher than 85% for which the scheme is very helpful.
What degree of support does the Minister want to give them when he is giving individuals a cheque for €20,000 who do not need it to buy a house? What does he want them to do with that money? Does he want to be able to go for a couple of foreign holidays? He is taking that money from other services. It is money that he could put into hospital trolleys, autism services or other areas which need it. In that context, where people do not require the funds to purchase their house, how does he think that it is appropriate to hand out cheques for €20,000 to more than 40% of the claimants?
The point is that the Minister argued for individuals who do not need the scheme to purchase their property because their loan-to-value ratio is below 85%. He also stated that he does not disregard the fact that this would support other issues. What other support do these people need? Some 41% of people who claim this tax relief do not need it. Why are we giving it to them? What further support does the Minister think they need?
The reason I am giving it and making it available through the Exchequer is I believe it is appropriate when we look at issues relating to the affordability of homes that we make a degree of support available, particularly for the first house purchase. I am aware of all the debates on this -----
Will the Minister explain why we should give a €20,000 cheque to 41% of these claimants who do not need the money in the first place? What is the rationale? They do not need this money to purchase their home; they are able to do it on their own two feet. Why is the State providing them with €20,000?
It goes back to the original design of the scheme, which provides broad support to help people buy their first property. It is also about creating a framework in which we will see an increase in supply of homes. While I would not make the case that the scheme is the key reason we have seen an increase in the number of homes being built in the State, as I could not stand over that, I believe it is contributing to that. According to the figures for housing supply during the lifetime of the scheme, the number of completions has doubled from 9,896 in 2016 to 18,000 in 2018, and this trend is set to continue.
I have acknowledged that means that just over 40% of those looking to access this scheme do not need the same level of financial support-----
I am answering the Deputy's question. For somebody who is looking to buy their first home, a case can be made for offering a degree of support for that. Even if I was to take the Deputy's point and say that somebody purchasing a home that has a loan-to-value ratio of less than 85%, and he may make the case that they do not need any support because they are able to purchase the home with that loan-to-value ratio, I would go back to the broader reasons a scheme like this is needed. It has been a contributory factor to an increase in the supply of homes in our country. Until I see the supply of homes get to a certain point, and I believe we still have a way to go on that, I believe a scheme like this has a role to play.
That is ridiculous. There is no evidence to suggest that two different metrics are connected. I will read from the Parliamentary Budget Office, PBO, examination in respect of this. It states:
In 2018, at least 56% of HTB claims were above the average house price (€286,931). This poses some risk as schemes which stimulate demand for more expensive properties could put inflationary pressures on property prices.
That is what this scheme does. It puts money into pockets of individuals, some of whom need it to get on to the property ladder and others who do not need it. We know that at least 41% did not need it but that figure will increase because there are people who had a loan-to-value ratio of, for example, 87% who would only have needed a portion of the scheme to benefit. This is about stimulating demand. There is no need to stimulate demand. We have 10,000 people homeless. Thousands upon thousands of people have moved back to live with their families in their childhood bedrooms. In some cases, couples and families have moved back home. There are people who are sofa surfing. Local authority housing waiting lists are bulging. The demand already exists. To suggest that putting money into pockets of individuals who do not need it to get onto the property ladder - in this case we are talking in the region of €40 million - is somehow leading to demand is wrong.
The rationale behind this scheme, and I am trying to figure out if the Minister has moved the goalposts or if we are sticking with this rationale, as was argued at the time by the then Minister, Deputy Noonan, was to assist people to get onto the property ladder and meet the requirements of the Central Bank, which meant that one needed to have 10% of the house purchase price. The rationale was that the State was providing one with 5%. It was to do with the affordability and the rules of the Central Bank at that time. I disagreed with it because as the Parliamentary Budget Office has outlined, increasing that type of demand can put pressure on house prices. It does not matter if more houses are built. If that is the rationale, the argument still exists that people will need assistance to get onto the property ladder. The only way we can combat that is by driving down house prices. The suggestion from others, including the PBO, is that this has gone the other way and put inflationary pressure on house prices, which is making it worse for families.
This scheme was supposed to end. That is written into the law of the land. The Minister cannot finish a scheme. He has the same problem as Fianna Fáil with property schemes. He does not understand when they need to end, and there is no justification to continue it at this point in time when the PBO is asking who is benefiting from it. It is the wealthier in society who are benefiting but why? We can see in terms of the breakdown of the value of houses that they are at the upper end of the scale. This is not a good way of dealing with the housing crisis. It has failed.
If I was a first-time buyer I would be praising the Minister. Who would not want €20,000 at the time when one is making a huge investment? Everybody would want it. They would want €40,000 or €50,000 if they have a Minister for Finance who was willing to write a cheque and hand it over to them but we have a responsibility to balance all the needs of society. The idea of providing this type of support for people who do not need it, which is going contrary to what we need in that it is pushing up house prices and which is concentrated at the higher level of house prices, does not make sense. The Minister needs to end this scheme.
Does the Minister's Department have any regard to the reports that are received from the Parliamentary Budget Office? It did a detailed analysis pointing out that the scheme is a subsidy to producers. Unless subsidies to producers are very carefully tailored or are happening, as when this was introduced, when a market is dead, they produce what subsidies to producers produce, that is, they line the pockets of the producers. In this case, they are providing an assistance to the building industry, which admittedly has many different problems, that is not required. They are effectively helping to drive up prices. In my constituency and that of the Minister, whether it is a new or a second-hand house, the traditional house that civil servants and so on looked forward to being able to buy, many of those properties have increased in price from €400,000 to €500,000. The analysis sent by the Parliamentary Budget Office shows clearly that a significant proportion of the people are so well off they can get the 85% loan values we just heard about. All the evidence is that they may be delighted to receive the subsidy but that they do not particularly need to receive it.
The Minister talked about €100 million being spent on this scheme. Is he even open to trying to target it, perhaps to people who are struggling to get on the ladder of home ownership and offer them some help, or is it his intention simply to help drive up house prices, which is what it is doing? I cannot understand the advice the Minister is receiving from officials and why we are receiving very clear advice from the Parliamentary Budget Office that was a new element. I understood he was possibly being advised to pay some attention to the detailed reports. Nobody from his Department contested the reports that we received, debated and examined yet the Minister seems to be of the view that he should simply ignore the distortions that the scheme as it is now, where he is proposing to simply renew it, has produced in terms of outcomes.
This is a producer's subsidy and, as such, the producer's subsidy is helping developers. I use the word "developers" because the financially driven model of house building the Minister is overseeing is producing results where, for instance, funds are now producing people who can attract money from investors. They are producing these monstrous proposals of strategic housing infrastructure that has 218 beds with a kitchen being shared on one of each of the six floors. We can talk about this all day. There are major problems around smaller builders being able to become active in the market while, at the same time, a wall of money is being thrown by investors into fund-type vehicles.
Hence, there is a phenomenon of various large companies, which have so much money that they do not know what to build, deciding to build bedrooms that they rent out forever. We are moving further away from a democratic model where home ownership is significant and important to everybody in the country. We want to retain that model, but the Government is changing it to a highly financialised model, which is driving up house prices and assisting a certain kind of developer. In 20 years, people who once aspired to own their own homes, having worked hard, will not be able to do so. They will retire in their 60s without a home on which the mortgage is paid. They are likely to be lifetime renters. The Minister has said that the Government is spending €100 million on subsidies in the housing market. Can that money not be used to target the people who need support, rather than those who, based on the evidence in the PBO report, could qualify for a significant loan? I am sure the Minister knows from his own commercial background that all of this is driving up prices, shutting more and more people out of the housing market and putting them into permanent and expensive rentals for life. They will not have an asset or security of tenure, and when they reach retirement, they will have to fall back on the willingness of the State to secure affordable rentals. They will not have access to a home they can ever own, but only affordable renting. This particular scheme was initiated by the former Minister, Deputy Noonan, at a certain point in time. I disagreed with it then, but it was a time the market was totally flat and developers did not have money jingling in their pockets. Now certain developers are so rich and attract so much investment that they can dictate terms to the Minister for Housing, Planning and Local Government and Fine Gael. This is the kind of stuff we once associated with Fianna Fáil, but with the way everything is going, it now seems Fine Gael has become the downtown office of the CIF.
I will respond to two points that were made, making reference to the PBO report, which I have read. The first charge made against me is that the scheme drives prices. The paragraph relating to this issue in the PBO report states:
The PBO undertook a modelling exercise to examine the impact of the scheme on new properties using data from the CSO. A difference in difference (DID) estimator technique is used to evaluate the impact the Help-to-Buy scheme had on house prices. It compares prices for new properties (treatment group) with prices for existing properties (control group) before and after the scheme was put in place. Overall, the results suggest that the HTB scheme did not have a statistically significant impact on prices.
The Deputy asked whether I took account of this report. She then claimed that this scheme drives prices. The report she is quoting examines the impact of this scheme on prices and concludes that it does not have a statistically significant effect on them. That is significant because the independent report I commissioned on this reached a similar conclusion. While it said that a small increase in prices may have been attributable to the scheme, the primary drivers of house prices remain wider economic conditions and the continuing misalignment between demand and supply. Let us bear in mind that this report, which is being used to anchor a charge that this scheme has led to an increase in prices, concluded that there is no evidence of a statistically significant impact on prices.
I refer to the impact of this scheme on supply. I again quote the report to which the Deputy referred:
When the scheme was announced there were concerns it could increase demand and lead to higher prices, particularly if the supply remained fixed. This would offset any gain made by the buyer as the benefit would be passed onto the seller through a higher price. However, following the scheme’s introduction there was a significant increase in the number of house completions.
It goes on to state that it does not claim this scheme is the cause of the increase in supply. I am not saying that either. I am making the case that this policy has contributed to the increase in supply we are now seeing. Another part of the report the Deputy has been quoting makes the case that any effect on prices is not statistically significant.
The Minister should also quote the conclusion of that report, which clearly states: "This suggests that the scheme did not fulfil its original aims in an efficient manner as the scheme supported a significant number of transactions that would have taken place without the scheme." That is the conclusion of the PBO. We can all read selectively if we want and while I do not dispute what the Minister said, I have also read other sections that state that there is a risk of inflationary pressures. We could argue about such issues for forever and a day, but this scheme has not fulfilled its objective and I am, therefore, pressing this to a vote.
I move amendment No. 11:
In page 20, between lines 24 and 25, to insert the following: “Tax Credit Claim
17.A tax credit can be claimed where travel to work is in excess of 15,000 kilometres per annum. ”.
The amendment concerns carbon tax. Throughout the country, many people travel a substantial mileage. Although some live in cities, due to their work they may have to travel to various parts of the country. Many people in rural Ireland are forced to drive because of the lack of public transport and people on average wages must rear their families, with the general costs of mortgages and so on.
The Government seeks to apply carbon tax, and I am sure the Minister will talk about the Government assisting people with fuel allowance and so on. Nevertheless, I refer to people who are not in that category and who have no choice but to travel long distances to work. The amendment seeks to raise the mileage limit to the figure stated not in order that everyone will reach it but rather for work purposes only. I ask the Minister to consider extending the tax credit to the people I have described. We are making some sections of the community poorer because they go to work, having got up early in the morning, in the way Government has previously highlighted.
I will support the amendment. The Government has introduced many plaudits and grand schemes, and often talks about climate change and the need for us to engage and change our ways, for which there are all kinds of incentives. As every member will know, however, people in rural Ireland often have to travel to work and college but there might not be any public transport such as a bus. Nevertheless, the Minister for Transport, Tourism and Sport, Deputy Ross, with the Government's support, wanted to lock them all up, take their cars and throw away the key.
This is a meaningful opportunity for the Minister for Finance to put his money where his mouth is and support such people. The limit is high enough that it will be used for genuine reasons. Many people, as the Deputy noted, have to crisscross and cover large areas. Where I live, people often have to cover Munster and Leinster, and that is the way it is. Hundreds of people leave County Tipperary every morning to travel to work in the construction industry in Dublin. Apart from the distance, there is pressure, use of time and fatigue when travelling in traffic.
The first 100 miles are fine but the rest of it is at a snail's pace. It is agonising and it contributes to pollution. The Government cannot seem to see that. In this case we are asking the Minister to assist, perhaps through a tax credit that could be claimed over 15,000 km per annum. It would be some meaningful attempt to have fairness and equity. It would support na daoine go léir, those fir agus mná who get up early in the morning, sometimes very early or in the middle of the night, to travel huge distances to work, and at huge risk also because they are out on the road in all kinds of weather especially at this time of the year. I appeal to the Minister to give serious and favourable consideration to these people. In a couple of years' time we will be trying to encourage them to change to electric cars and so on. We need to show some cause or sentiment of understanding as to how difficult the challenges are they face with the kilometres they travel.
Individuals can already claim a tax deduction for the costs of travel expenses necessarily incurred in the performance of the duties of their employment or office. This does not include the cost of travelling between home and work. It is a long-held view, supported by much case law, that expenses of travel between home and work are not wholly exclusively and necessarily incurred in the performance of the duties of an employment.
Deputies Fitzmaurice and Mattie McGrath appear to be suggesting a broad-based relief rather than a targeted scheme. In this regard I draw their attention to the tax expenditure guidelines issued by my Department, which stipulate that "the key rationale for Government intervention ... by way of a tax expenditure ... should be the existence of a market failure" and that a tax-based incentive should be more efficient than a direct expenditure measure. A measure such as the one proposed does not appear to address a clear market failure in circumstances where alternative measures are already available.
I appreciate that some people are using cars to travel long distances to where they work and I am aware that many might not have the public transport options that are available to people who live in our larger cities. Leaving aside the very obvious difficulties in ensuring compliance for such a scheme, providing a relief specifically for those who live further from their place of work - in this case perhaps 20 miles or more each way - would also raise questions from an environmental perspective with the kinds of changes we are looking to make in the long run.
I absolutely understand why the Deputies have put forward this case. With regard to making a change in carbon pricing - and going back to Deputy Fitzmaurice's comments - we are not looking to introduce carbon pricing or carbon taxing; it is already in place. We are looking to increase it further.
Putting in place a measure such as proposed by the amendment would also create huge challenges for us from a compliance point of view and for Revenue in trying to ascertain whether the travel had actually occurred. It would also raise the challenge that we would be putting in place a tax subsidy for journeys that are already happening. We want to provide ways to reduce the number of journeys and over time try to make more of them available to be completed through public transport than is currently the case.
I absolutely accept that the effect of the change in carbon pricing is very different for citizens who do not have many public transport options available to them. For the reasons I have outlined, however, I am regrettably not in a position where I would be able to accept amendment No. 11.
The Minister talked about market failure. The reality of market failure is that in many parts of the country, and through no fault of their own, people must drive distances to work simply because there is no public transport, as the Minister has already outlined, and probably because balanced regional development is not in place. A person must drive 20, 30 or 40 miles to make sure they are able to provide for their families or for children going to college, yet the Minister said there would be a difficulty in carrying out such a scheme. It would not be such a difficulty for a person to prove the mileage he or she is doing. It is not aimed in any way at incentivising people. Reference was made to trying to get people onto a different route. There is a sad reality to some of what we are trying to do here. There are people in what I will call "middle Ireland" who do not qualify for anything. If one is on a lower income threshold then one might qualify, and there are some helps for people who would be at the lower thresholds. I recognise that but I am talking about people from the middle Ireland who pay most of the taxes, and who go out to work every morning and do the normal things of trying to keep kids in school, trying to keep a mortgage paid and trying to keep the students in college. These people would not be getting any more in their wages. They would be going from their house to their place of work. It is not that they would be zooming around the country for the sake of it. Nobody decides or wants to be travelling like that. I know people who commute from Roscommon to Intel. There is no public transport system there or to other such places, be they in Westmeath or Kildare, that would take people to or from work when they need it. I will not criticise that because one cannot be all things to all people, but we have to give a bit of recognition to these people. To be quite blunt, all we are doing is kicking them in the teeth in every budget.
The Minister is talking about the change in the numbers of diesel cars and emissions and so on, but we make no goodwill gesture whatsoever. The Construction Industry Federation, which I am sure the Minister meets regularly, has said that its members cannot get tradespersons. Workers must travel, even farther from Tipperary and other places, up to work in Dublin. They do not have public transport to suit them, or it is not available at times they need it. There is an impact. They could not afford to stay in Dublin, even if they could get a bed. The Government is really squeezing these people. Many of them have families at home and in those cases the family may have to have a second car. The van might be used for work and the family would need a second car to bring kids to school and to do all the other necessary shopping and living in the country when one does not have public transport or the access to services. We need to have some bit of imagination here and try to look at this. There should be no problem with enforcement or verifying how the miles are clocked up. We are not talking about leisure purposes, we are talking about travelling to and from work. If a person is working on a major project in a bigger city he or she could be travelling there for six months, a year or two years. They could easily get verification of their travel. It is not that they want to travel. Many of these people do not have the choice but to travel or they could lose their employment. Do we want that? We have problems enough getting people to fill positions now, but thankfully that is a good complaint. We must support the people who are the middle Ireland, as we referred to earlier. They are all the time being knocked and kicked back, and they get no incentives or supports.
I appreciate the reasons for the Deputies tabling this amendment. In my response I acknowledged there is a world of difference between the effect of carbon pricing on somebody who has a bus or a Luas at the end of their road and somebody who does not. Not acknowledging that reality is going to make it even more difficult to try to win the arguments around changes such as this in the future. I take on board Deputy Fitzmaurice's comments when he spoke about the difference in public transport options between living in Dublin or living in Ballinalsoe. There is an obvious and very big difference, but I differ from the Deputies on their proposed tax credit suggestion. First, if we were to go down that road, anybody anywhere would be able to claim it, including those who live in cities and who have public transport options.
Second, and I appreciate the difficulties with this, but over time we are looking to provide the changes in respect of where employment is created, how we organise Bus Éireann and incentives for hybrid and electric vehicles to try to change the travel journeys that have been referred to which, ultimately, are difficult for those who are making them but also have consequences for our environment.
Finally, there would be compliance difficulties with something like this that the Deputies may well feel will not be realised but, ultimately, we have lots of other experience within the tax code whereby when we bring in changes such as this but do not have a way of proving that they are going to be properly implemented, difficulties occur.
The Deputies referred to middle Ireland on a number of occasions. I know well the needs of middle Ireland, like they do. We are trying to make progress in meeting their needs in other ways but I, regrettably, do not feel that this is one of the ways in which we can do it.
I move amendment No. 12:
In page 20, between lines 24 and 25, to insert the following: “Report on tapering out income tax credits17. The Minister shall, within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on tapering out income tax credits for incomes between €100,000 and €140,000 at a rate of 2.5 per cent for each €1,000 earned.”.
I will withdraw my amendment and I may resubmit it on Report Stage.
I move amendment No. 13:
In page 20, between lines 24 and 25, to insert the following: “Report on income levy on high incomes17. The Minister shall, within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the introduction of a high income levy of 5 per cent on high incomes in excess of €140,000.”.
I withdraw it but I will retable it on Report Stage.
I move amendment No. 14:
In page 20, between lines 24 and 25, to insert the following: “Report on maintaining Mortgage Interest Rate Relief17. The Minister shall, within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on maintaining the current Mortgage Interest Rate Relief until such time as mortgage interest rates are equivalent to the European average.”.
I withdraw my amendment and may look at it for Report Stage.
I move amendment No. 15:
In page 20, between lines 24 and 25, to insert the following: “Report on re-introduction of Trade Union Tax Relief17. The Minister shall, within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the reintroduction of the Trade Union Tax Relief.”.
This tax relief probably comes down to the way someone views trade union membership. In my view it is healthy and is healthy to promote it. A key goal of workers and unions is to achieve wage growth that outstrips the increasing cost of living. We can see that one of the ways to do so is to increase the bargaining power of workers through their unions, them to negotiate larger slices of the pie on behalf of workers while also encouraging and enhancing productivity. We can see from many of the analyses that have been done at international level that this can go hand in hand. Where there is a well organised workforce, there are heightened levels of productivity that benefits not only the workers but the employers.
This State has moved away from that trend for different reasons and I do not suggest that the tax credit is the only reason. The labour force survey showed in 1994 that nearly half of all employees were members of a union but by last year, the figure had fallen to 25%. What has happened in the private sector is more concerning. Union density was 20% in 2010 but six years later, the figure had halved.
A review was completed following a commitment made in budget 2016 to examine the appropriate treatment for tax purposes of trade union subscriptions. The scheme that operated in the past, which provided an income tax relief of €300 in respect of trade union subscriptions, should be reintroduced. At the time a small amount was available to workers but, in 2010, when it ended, 337,000 workers were availing of the tax credit, which was the equivalent of €70 per annum for union membership. Now we have rehashed this matter on Committee Stage of the Finance Bill in previous years, regarding the differences between the treatment of members of trade unions and members of other organisations who can write off their dues or fees against their tax bill.
The trade union tax relief or credit was abolished in 2011 at a time of deep austerity when many reliefs and credits were abolished. Given that the State has the third highest rate of low-income workers in the OECD, and the fact that we have had other debates about how taxpayers subsidise the SARP scheme and so on, the reintroduction of the trade union tax relief should be considered under the legislation. That is why my amendment seeks a report on the matter to be laid before the House within six months.
I support the preparation of a report that would examine the issue of the reintroduction of tax relief on trade union subscriptions. Low pay is a serious problem in the economy. We know from the information and analysis being done by various bodies that it is a growing problem, particularly in terms of the gig economy. One of the ways to ameliorate and limit the downsides of the gig economy, and the abuse of workers, is for workers, particularly workers on low pay, to be encouraged to be able to join a trade union so that representations on their terms and conditions of work can be made. It is notable that since Ireland joined the EU there has been a significant expansion of individual workers' rights, whether that is women at work, older people at work and people with a disability being able to find work. We have done that in the context of our membership of the EU, which has, by and large, encouraged a social partnership model.
There is no doubt that we also have an alternative model in recent times in the economy, which is significant foreign direct investment. Many multinationals are anti-trade union because that is the tradition of the economies and regions that they come from. However, we also have a significant problem in sectors such as the hotel and hospitality industry. We have a significant problem affecting women workers who are on low pay. One of the few ways of addressing the low pay issue is the Low Pay Commission which, I, as Tánaiste, set up and agreed with the Minister's former leader, the then Taoiseach, Enda Kenny. This was to review the issue regularly. We need to move from minimum wage increases on a regular basis for the economy to thrive. It is a pity that on budget day there was no announcement that the minimum wage increase recommended by the commission would be implemented in January. We have been told that the increase has been just postponed rather than cancelled, and we can come back to that at another time.
I do not understand why there is so much opposition to the proposal for trade union relief and a study in this regard when all of the international evidence proves that economies featuring a well paid workforce do particularly well in combating problems such as poverty and lack of employment. Certain American cities, for instance, have introduced protections for workers. All of the evidence intimates that they are the cities that have grown because they are more attractive places to live and in which to operate.
It makes a lot of economic sense to examine the support available for trade unions. A tax relief would be a support to trade unions. We have an example of a tax relief that is in the current tax code, as the Minister's officials will be aware. I refer to donations, for instance, to charitable organisations, including Concern, that do an awful lot of work in the Third World. The relief means that the body, which is the subject of the donation, can claim a tax relief.
I can understand that there may be an awful lot of objections in principle to any kind of tax relief for trade unions on the part of the Minister's officials. We have incredible tax reliefs for businesses that come to Ireland, some of which have fantastic records in respect of conditions of employment while others have appalling records and are driving down our standards and the standards of living of our people. There are a number of different approaches available with regard to this. The Minister can ask his officials or the Parliamentary Budget Office to come up with a report that would look at the pros and cons and the experience in other countries, which is that when wages and conditions are good, an economy is more likely to thrive. I saw the Deliveroo workers cycling around town in the rain yesterday and wondered what kind of pay and conditions they are on. Many of our economies are moving to that model. If we have a vigilant trade union movement that represents workers who have poor pay and conditions, allowing the contributions of workers to the unions to be reflected in some kind of tax relief scheme to enhance the finances of trade unions will repay the wider economy. We must bear in mind that a trade union subscription is being paid out of after-tax income in general and, therefore, the reason for recognising that this tax might be repaid is the fact that it is coming out of the after-tax income. If we recognise that the work of trade unions is valuable, we would provide a scheme where some or all of that tax that has been borne by workers out of the income they use to pay their subscription would be recycled within the economy back to the trade unions to allow them to continue their really important work of representing and defending workers' rights and in that way, defending our standards of living and our society so I support it.
I will deal with the matter raised by Deputy Doherty that is at the heart of all of this, namely, what one's view of trade unions is and what role one thinks they play in an economy and society. Trade unions have a very important role to play in our society. I spend a considerable amount of time dealing with them. I spend my time dealing with differences but, at times, there are lots of things on which we agree. I believe the most important relationship between where economies meet societies is the share of our national income that is absorbed in earnings to workers. When that trend goes down, as it has, it creates really big problems for living standards and the return citizens get from working. The analysis put forward by Deputy Burton regarding the effect that healthy unions and healthy economic institutions can have on living standards is right. I read the same analysis myself and I can see it. While we might differ a bit around the edges on it, Deputy Burton is correct in respect of the core point that when collective institutions work well, they can play a role in economic gains being distributed fairly and if that fair distribution happens, it is good for living standards and maintaining consent for how economies should work. I do not know why Deputy Burton is addressing her comments to my officials here. I must reassure her that they are very reasonable officials and the advice-----
They may well be. It is a matter for them. All they do is evaluate the pros and cons of different things we must do and evaluate. What I would say with regard to the point made by Deputy Doherty is that I fundamentally do not believe that it is the place of the Finance Bill to require me to produce reports. On the other hand, because of Standing Orders, it is pretty much the only kind of amendment the Deputy can put down. If he was to agree to withdraw his amendment, I will ask for a report that would look at the pros and cons of this and what is international practice. The Deputy will be aware of the other reports on this that have been done that say it is not worth doing and that there is a really big deadweight cost.
From a practical point of view, the gain it could provide for citizens could be as low as €1 per week. The factors that are now influencing members of trade unions within the private sector in particular are far deeper than the cost of joining that trade union. All that being said, I am as aware as the Deputy is of what is happening with changes in parts of our economy. I accept the overall point that strong collective institutions and representative bodies can help play a role in making sure gains are fairly distributed. In my three years as Minister for Public Expenditure and Reform in particular, I have had plenty of engagement with the trade union movement in Ireland and while I disagree with it about a number of things, I also believe it is an important institution with regard to how we can have not only a good economy but a good society. If the Deputy is willing to withdraw the amendment, we will get that report done and perhaps it can play a part in a more informed debate on this issue in advance of the next Finance Bill.
If the Minister is going to produce such a report, he should also include an examination of the subscriptions individual employees pay that are not wholly, exclusively and necessarily required for the performance of their duties but which they pay, be it to a professional body or a representative body. They currently get no tax relief on those subscriptions in the same way as somebody paying a trade union subscription does not get any tax relief. Those issues should be examined. They do not have to be the main part of the report but the Minister should have regard to them because not all employers pay those subscriptions or membership fees and, technically, because they are not a necessary requirement of somebody's employment, that person cannot claim them as a deductible expense.
My next point is tangential but it might be my only chance to raise it. Can the Minister give us an update of the review of the flat rate expenses? I am very conscious that we are here considering the Finance Bill but for 2020, there may be changes to people's take-home pay that we are not considering because Revenue is conducting its review of flat rate expenses. Any change that will come in will be an administrative one so it will not come before the House. It is something we need to be cognisant of and at least discuss. Can the Minister give us any update on where that stands?
The timing of the election next year will determine that there will be no changes for a while. It is a valid point. On a serious point, I welcome what the Minister said. Obviously, the intention of this amendment is to ensure a report is produced. The Minister has agreed to produce that report. Therefore, I will withdraw the amendment. I hope that we would receive this report in sufficient time. We called for six months. I know some reports are released on budget day, which is problematic to say the least given the amount of information that is released. If we could try to ensure it is done within the same timelines, it would be appreciated.
I very much welcome the Minister's remarks. One of the problems the Minister may have is the complication of the scheme given the relatively small amounts of contributions. However, the donations scheme and the tax relief relating to donations to Third World charities and other charities, which basically allows the receiving body to claim a standard rate-based tax credit provided that whoever has contributed has given his or her name and address and is a taxpayer, might constitute a much easier way of doing it. It might not produce the same value of income as the original scheme used to produce.
However, it could be a very important stream of income with a high level of certainly where people joined a trade union. I urge that this aspect also be examined. It was introduced by Ruairí Quinn in the 1990s and has worked well for the various charities. They would probably like it to work better, but it has certainly worked quite well for them.
Yes, I will. It would not be the subject matter of the report because it is about a different matter, but I will ensure that part of the report will look at this issue which the Deputy has raised on many occasions. We will give it recognition in the report.
On Deputy Pearse Doherty's point about timing, we will do it within six months. The report will not be about the role of trade unions in the economy or society; rather, it will be about the very specific issue of tax relief, acknowledging past views, and look at what happens elsewhere to see whether there are options for us and what the pros and cons are. To manage everybody's expectations, I am not committing to seeking a tax strategy group type paper or something on that scale, but I believe that within six months we can sum up how it happens elsewhere, the pros and cons in whether it should be done and inform the committee and the Minister of the day on the issue. Many things are happening in the global and national economies that need strong governments, parliaments and institutions such as unions. We should be looking at these matters afresh.
To respond to Deputy Burton's point, I am sure the report that will be produced by the Department of Finance can look at that option.
Work on that issue is under way in the Revenue Commissioners which are independent of me. I hope that in the coming weeks we will be in a position to update the Oireachtas on the work that is ongoing.
I move amendment No. 16:
In page 20, between lines 24 and 25, to insert the following: “Report on income tax relief
17.The Minister shall, within 6 months of the passing of this Act, prepare and lay before Dáil Éireann a report on an income tax relief equivalent in value to one month’s rent of an individual available to all renters not already in receipt of any State subsidy examining the social and economic impact of this measure in the context of high levels of rent.”.
This amendment is in the format we have to use, namely, "a report on an income tax relief equivalent in value to one month’s rent of an individual available to all renters not already in receipt of any State subsidy examining the social and economic impact of this measure in the context of high levels of rent". We are talking about high levels of rent and the Minister is well aware of the current figures from the RTB. The national average is €1,202 per month, with renters in Dublin seeing a significant increase and experiencing greater pressure as the level stands at €1,713 per month. These figures represent an annual increase of 7% and there is no sign that it is slowing down.
It can be seen that the cost of rent is outstripping wage growth for many renters, including young families and workers. I discussed some of the resultant impacts earlier. We can see the outcome, with people having become homeless in emergency accommodation, while others have moved back into their parents' homes. Many are at the pin of their collar in just trying to get through the week. The rental market is broken and we need to fix it. As we do so by increasing capacity, we must also ensure relief and a reprieve for renters. We are asking, therefore, for the introduction of rent relief equivalent to one month's rent for those renters not already receiving a State support.
Prior to my or the Minister's time, rent relief was introduced in 1982 through a finance Bill. It was introduced initially to alleviate the pressure of the high cost of rent for those aged over 65 years. In the following years it was extended to all age groups in society and available to everyone. In 2009 the Commission on Taxation argued that it was actually increasing the cost of private rented accommodation and recommended that it be discontinued. It was abolished in 2011 by the then Minister for Finance, the late Brian Lenihan. It was not abolished overnight but phased out. Many other property related reliefs were also, rightly, then on the chopping block. We all know about some of the property reliefs and how they contributed in no small part to the financial crash we suffered later. I refer to a budgetary perspective. The reliefs also led to some of the banking problems. Rent relief was not available to any first-time renter after 7 December 2010, which change was made in a finance Bill. However, it continued up to last year for those renters who were already in receipt of it. It was phased out over several years, between 2010 and 2018. However, in the previous year it was possible to obtain relief up to a figure of €400. It was available at a higher level in previous years.
The Minister is familiar with our position. We believe three things need to happen. The first is a rent freeze to deal with the concerns expressed in the report of the Commission on Taxation. It rightly pointed out that rent relief was leading to an increase in rental prices because landlords were pricing in the relief and passing on the cost to renters. The introduction of rent relief, therefore, has to coincide with a proper rent freeze, as we have seen in some jurisdictions recently. We also need the burden of rent to be lifted from renters. The third measure for which we are calling is a significant increase in capital investment in public housing, including cost rental units. One of the concerns of the Commission on Taxation about the rent relief measure introduced in 1982 was that it did not benefit those who did not have taxable income, including some students and others in the low income bracket. That is why we have argued a refundable tax credit or relief should be introduced. I have made my pitch now and think this change is warranted. It would affect about 250,000 renters and is badly needed.
It is ridiculous that people who could get a mortgage to buy the property they are renting would pay less per week or month than they pay in rent at present. The system is broken and annualised increases are only going in one direction. Something has to give. Up until now that has meant people giving up their rental accommodation. In some cases they have fallen into homelessness and emergency accommodation but, in more cases, people have ended up moving back in with their parents. This is not a far out proposal. It was done 1982 and up until 2017, people were getting rent relief. This is not a mad, radical Sinn Féin idea. What we are trying to do is take into account the concerns of the Commission on Taxation and address them through the refund while also introducing a rent freeze as a temporary measure. There is no point in introducing rent relief as a temporary measure unless we bring in a rent freeze and increase capacity. A significant increase in capacity should have the effect of reducing rents throughout the State but even with the right resources, that will take at least three years. That is why my party is arguing for this relief to be put in place for at least three years.
I thank the Deputy. The previous tax relief in respect of rent paid was abolished in budget 2011 and is no longer available to those who commenced renting for the first time from 8 December 2010. This followed a recommendation in the 2009 report by the Commission on Taxation that rent relief should be discontinued. The view of this independent commission was that, in the same manner in which mortgage interest relief increases the cost of housing, rent relief ran the risk of increasing the cost of private rented accommodation. Accordingly, the result of reintroducing this relief would be the risk of a transfer of Exchequer funding directly to landlords, which would not have the intended effect of reducing the pressure on tenants. In addition, a tax credit of this nature would be of little benefit to lower-income workers, the unemployed and students who may not receive the benefit of the relief as they may not be paying sufficient income tax. The Government has taken many different steps to address concerns about the cost of rental accommodation, including significantly increasing capital investment for the availability of more homes within our country.
Finally, at the time of its abolition, rental tax relief cost the Exchequer up to €97 million per annum and based on certain assumptions, it is likely that the annual cost of the Deputy’s proposal, if introduced, would be even higher. I listened carefully to what he said and accept that many tenants are under severe pressure because of increasing rents. I acknowledge the effect that has on their standard of living and on their concerns regarding the future and where they will live but that is why we have rent pressure zones, RPZs, in place under which we have capped the magnitude of rent increases that are planned. If we were to introduce a measure like this, there is a risk that rent increases would always be pressed right up against the cap on allowable increases in the RPZ in which a home is located. It is for these reasons that I am not in a position to accept the Deputy’s amendment.
If the Minister accepts all my positions, those reasons disappear. The Minister made a point about rent increases going right up to the RPZ caps but I said that there is no point in bringing in a measure such as this unless a rent freeze is also introduced. It is of little comfort for those who are paying an average of €1,713 per month in Dublin, or in excess of €2,000 in some cases, that their rent will only increase by 4% next year. They are already stretched. When one has an elastic band and one has taken it to the point where it is about to snap, telling the elastic band that it will be okay and that it will only be stretched a little further is no good because it will snap. That is what is happening in this regard. The system is broken and renters are the collateral damage. If a rent freeze was introduced, rents could not increase to the higher level.
The second argument that the Minister made related to students and those on low incomes but I addressed that point in my opening contribution. If this is a refundable tax credit, it means that they will also benefit from this measure. This can be designed in a way that allows those on low incomes who do not have a tax liability to benefit from the relief.
The Minister is correct that the relief was abolished but people can still avail of rent relief now. People will also be able to avail of rent relief next year and up until 2021 because of the retrospective nature of claiming reliefs going back four years. In 2018, the eight-year phasing out period was completed. Data for 2015 show that 135,000 renters benefited from rent relief while in 2009 and 2010, 200,000 renters benefited. The pressure on those 135,000 individuals four years ago or on those 200,000 renters ten years ago was far less than it is today. There is no comparison between the pressure on renters today and the pressure on them ten years ago but we provided rent relief ten years ago to 200,000 renters, even though the relief was being phased out. There was a justification at the time for abolishing the relief because it pushed up rental costs but that can be dealt with by the introduction of a rent freeze.
This should only be a temporary measure. We should not provide rent relief to renters per se. That should not be part of our tax code because it should not be necessary in a society with a functioning rental market. I do not want to get into party politics on this but the system is broken, for whatever reason. I could argue that it is because of Fine Gael or whatever but regardless of the cause, the system is broken when people are being asked to pay these rents. We have a duty and a responsibility to take some of the burden off them. There is a way of designing this that deals with the issue of rents reaching the upper cap, that is, by introducing a rent freeze. The argument made by the Minister about those on low incomes and students is addressed by the refundable nature of the relief.
To deal with each of those matters in turn, in an earlier contribution, I explained why I am not in a position to introduce refundable tax credits and reliefs within our system. I explained the technical difficulties that exist. I made the point that if we were to bring in refundable credits, it would of itself have a cost consequence that we would have to take on board. The figure I shared with the committee, which in fairness was for all reliefs, was €2 billion. I would not be in a position to introduce a refundable relief for one area but not for another; there would be an expectation that it should be introduced across the board. The Deputy is assuming that I can do something that I have said the Exchequer cannot afford. Even if we could afford to do it, despite the significant technology available to the Revenue Commissioners, the technical capacity is not there to do it. Earlier I explained why we cannot do it. In his presentation on rent relief, the Deputy referred to a refundable relief but the amendment to which I was speaking does not. He clarified that in his statement.
The Deputy said that my concerns about this could be dealt with by the implementation of a rent freeze. There is no rent freeze at the moment and the Minister for Housing, Planning and Local Government has explained on a number of occasions on behalf of the Government that the introduction of a such a measure could have unintended consequences. It could make it even more difficult for tenants in the future and those who might be tenants in terms of the supply of rental accommodation and what might happen in the rental sector.
The Deputy has resisted the urge to go down the road of making political charges on this and I will do the same.
I accept the point that we have significant issues with rent levels and what this mean for those paying rents and their fears for the future. My genuine assessment of the Deputy's proposal is that in the absence of a freeze this is not the correct policy measure. While a freeze would be attractive in the short term, beyond that it could have difficult consequences. I then said that in the absence of a refundable approach, a road I do not want to go down in the tax code, we could end up putting in place a tax credit scheme that does not benefit those who need it the most, similar to the argument the Deputy looked to make against me on an earlier amendment. In any event, the Deputy is aware of the pressures that mean rent increases are pressed up more and more against the 4% cap. My assessment is the implementation of such a measure could be a further catalyst of this happening. This would not be in the long-term interests of tenants or the use of taxpayers' money.
There is no point talking about the 4% cap because rents are increasing at a rate of 7% annually even in RPZs. This has been discussed on numerous occasions at various committees and in the Dáil by myself and others with regard to the ways around the 4%. This committee relies on verifiable statistics. Rents are increasing at 7% annually. The Minister argued that a temporary rent freeze would have other effects. I assume he is suggesting it would drive people away from investing in the market. We know what is happening and we will get to it later. Large institutional investors are buying up property. The funds are now the largest landlords in the State and later we will discuss the big giveaway in terms of how they are taxed.
I wonder whether, if rents in Dublin were €3,400 instead of an average of €1,700, we would make the same argument. I genuinely believe the Minister would. Of course, a rent freeze can be introduced. One was recently introduced in a European jurisdiction. We can do it if we believe rents are too high at a point in time. There should not be an indefinite freeze. We would not be allowed to do that indefinitely under the Constitution but it would be allowed on a temporary basis.
I do not buy the argument on the refundability of tax credits or the idea that if we introduced a refundable tax credit in this regard, we would have to do it for every tax credit. That is not true. It is us in the House, who are elected by the people, who decide what tax credit is refundable. There is no legal requirement on us. There is nothing in the finance code or any legislation ever passed in the House that states if a renter's tax relief was refundable, we would have to do the same for every other tax relief.
With regard to the capacity issue, I take the point. I missed the earlier discussion on the €2 billion cost of reliefs to which the Minister referred. The number of people who are able to avail o tax reliefs and multiple tax reliefs in the State is substantial. The number is approximately 250,000. The majority of the individuals who are renting, particularly given the levels of rent, are not receiving support from the State and this means they have a taxable income but a small but significant number of cases, such as students and others, need to be addressed.
I made the point earlier that I have great respect for the Revenue Commissioners and their ability and for the Revenue online service. I do not buy that they would not be able to deal with, in all likelihood, 10,000 or 20,000 refundable credits. We must remember that when this relief was introduced in 1982, the requirement was to submit an application to Revenue for the credit. It is not outside Revenue's capacity to be able to deliver a refundable tax credit in this regard. We are not speaking about 2 million workers or millions of different reliefs or credits that could be available throughout the entire tax code. We are speaking about a specific relief and a cohort who would be able to avail of that relief.
It is a reasonable inference to assume the Deputy believes it was implicit in my argument but it was not. What is explicit in my argument is the experience of knowing if we make a change in the implementation of a relief in one part of our tax code that would ensure it would be more than beneficial to people on lower income, the demand to do it in respect of other reliefs in our tax code would be high. It would be difficult to make the case regarding why we should ring-fence refunds for one tax credit while saying that others would not be refundable. The figure I have for making all of our reliefs refundable is €2 billion.
With regard to the technical capacity of the Revenue Commissioners, the Deputy is entitled to his view on what they might be able to do and he has acknowledged the respect he has for them. He can have a view on them. I am accountable to him for the policy commitments I make that they then implement. Their advice is they do not believe they would be in a position to implement a refundable approach to all the credits in our tax code.
I am not arguing for refundable tax credits throughout the tax code and I am not arguing that Revenue has the capacity to do it; I am arguing for one relief. The Minister makes the valid point that if we make a tax credit refundable in one area, there would be an expectation other areas. I am sure every PAYE worker will have an expectation that the Minister should exempt one third of their income from income tax because he has just done it for 1,000 employees. It is the same argument. Is there now an expectation that all other workers will get one third of their income exempted from income tax in the way that has been done for SARP? Do they have a legitimate expectation? Yes. Will the Minister do it? Not a chance in the world.
The committee could make this decision, because of the issues for renters and the pressure they are under, and because certain people who are renting and seeing increases, even within the RPZs of 4%, are being pushed over the edge and into homelessness and back to their families. It is weighing heavily on them in terms of financial stress. We all know what financial stress can do to one's physical and mental health. There is an issue as the system is broken. If the Minister introduces a refundable tax credit for this cohort of individuals, a minority of them would avail of it and that is easily within the capacity of the Revenue.
I acknowledge what the Minister is saying. We are having a factual argument but there is an underlying issue. That is the problem. We are dealing with one issue in the Bill and we will deal with other areas where there are nice wee benefits. These guys are crying out for help. This is not radical. We had a tax relief when rents were half the price they are and when we did not have 10,000 people homeless or the pressure and the crisis we have.
-----some kind of a perception of me. It is correct that the decision I made on SARP is factual but what is not factual is the Deputy looking to create a perception of me as making tax decisions that look to benefit an elite. I am as aware as the Deputy, as I say to him on many occasions, of the type of suffering or difficulty to which he refers. The decisions I made, which were factual, with regard to SARP, are driven by my view that not having such a scheme in place over time could affect employment in the international part of our economy.
That is all that motivates my views. I am expressing it as the Deputy brought the special assignee relief programme, SARP, into the debate. It is welcome that the Deputy has acknowledged that there would be a demand for making part of the tax code relate to refunds. It would create a demand and expectation that it would happen across many existing reliefs. I am informed that were it to happen, the overall cost would be the figure the Deputy and I have adebated.
I am being told to repeat again that it would be very difficult technically to do what is set out in the amendment. I am aware of some of the policy merits of refundable tax credits and know of the effect on those on low income. I am informed that it is not something we can do.
I brought SARP into the discussion to help to explain that there would be a legitimate expectation on the part of PAYE workers if they knew what Minister has done. I will say it to his face that he is making decisions that will benefit the elite; I would not say it behind his back if I was not willing to say it to his face. Of course, that is what happening with section 8 of the Bill. It will benefit the elite. In some cases the people in question are multimillionaires. That is my view, but the Minister has a different version, which is that it is being done for a wider and more noble cause as he outlined to the committee. Whether there is that expectation, PAYE workers could legitimately ask why somebody availing of the SARP can have 30% of income excluded from taxation when they cannot do so, despite bursting their backsides in working on a factory floor and paying €1,700 per month to try to keep a roof over their heads. It could be a legitimate expectation. I am trying to counter the Minister's point and, regardless of the expectation, there is no requirement for us to legislate for it. It was mentioned that this would cost €2 billion, but it would not as refundable tax credits would not be introduced across the board. There is a crisis in housing provision and did we all not sign up to the idea that there was a housing emergency? If there is such an emergency, we must act in a way that reflects it. There was no such emergency ten years ago when rents were lower and there was rent relief provided. I am arguing that this should be introduced on a temporary basis, to be joined by the two other prongs of a rent freeze and a significant increase in capital investment to increase capacity in the system. Even if rents were to stay as they are, they are not affordable. The costs the State is asking families to bear every month are mad. I will leave it at that.
I move amendment No. 17:
In page 20, between lines 24 and 25, to insert the following: "Amendment of section 97 of Principal Act
17. Section 97 of the Principal Act is amended by the insertion of the following after subsection (2K):"(2L) (a) In this subsection- 'annual service charges' means the expenditure described in section 18 of the Multi-Unit Developments Act 2011;
'commercial unit' has the same meaning as it has in section 1(1) of the Multi-Unit Developments Act 2011;
'multi-unit development' has the same meaning as it has in section 1(1) of the Multi-Unit Developments Act 2011;
'owners' management company' has the same meaning as it has in section 1(1) of the Multi-Unit Developments Act 2011;
'residential unit' has the same meaning as it has in section 1(1) of the Multi-Unit Developments Act 2011;
'unit' means a commercial unit or a residential unit.
(b) A deduction shall not be authorised by subsection (2) in respect of the annual service charges due to an owners’ management company in respect of a unit in a multi-unit development unless the person chargeable can show that:(i) in respect of a residential unit the registration requirements of Part 7 of the Residential Tenancies Act 2004 have been compiled with in respect of all tenancies which existed in relation to that residential unit in that chargeable period, and(c) For the purposes of subparagraph (i) of paragraph (b), a written communication from the Residential Tenancies Board to the chargeable person confirming the registration of a tenancy, relating to a rented residential premises to which paragraph (a) applies, shall be accepted as evidence that the registration requirement in respect of that tenancy (and that tenancy only) has been complied with.
(ii) the annual service charges have been paid to the owners' management company.
(d) For the purposes of subparagraph (ii) of paragraph (b), a written communication from the owners’ management company to the chargeable person confirming the payment of the annual service charges relating to a unit to which subparagraph (ii) of paragraph (b) applies, shall be accepted as evidence that the annual service charges have been paid.".".
As this amendment deals with the substance of both amendments, there is no need, as such, to respond specifically to amendment No. 18. In essence, the effect of the amendment is to prevent a tax deduction for annual management charges or fees against rental income, unless a landlord has registered the tenancy with the Residential Tenancies Board, RTB, and paid the management charge to the estate owners' management company. We all agree that having tenancies registered with the RTB is more than desirable and what is expected. It is the law of the land. We also acknowledge that there are very significant problems in many multi-unit developments with maintenance and upkeep. Many management companies are not functioning because of a failure in some cases by owners to pay the required management fees to them. The thrust of the amendment is to see if the Minister is willing to examine the proposal.
Amendment No. 17 specifies proof of payment of management fees by landlords and registration of tenancies with the Residential Tenancies Board, RTB, in order to obtain a deduction of such expenses for tax purposes. I will deal first with the registration of tenancies with the RTB.
Section 97(2)(e) of the Taxes Consolidation Act 1997 permits the deduction for tax purposes of "interest on borrowed money employed in the purchase, improvement or repair of the premises" against rental income. However, section 97(2I) provides this interest relief is not authorised unless the person claiming it can show that the requirements under Part 7 of the Residential Tenancies Act 2004 to register residential tenancies with the RTB have been complied with. The purpose of section 97(2I) is to encourage compliance with RTB registration, rather than to deny the tax relief for interest. To ensure compliance with RTB registration, the return of income form, Form 11, includes a tick box to confirm that the tenancy is registered with RTB. If the box has been ticked and, on examination of the return, the Revenue Commissioners find that the tenancy had not been not registered with the RTB at the time of filing the return, interest deductibility is denied.
Landlords are required to register details of all of their tenancies with the RTB within one month of the commencement of the tenancies. Whereas new tenancies should be registered within one month of their commencement, provision is also made in the Residential Tenancies Act for late registration at double the normal fee. An acknowledgement from the RTB confirming registration in the case of a late registration will be accepted by the Revenue Commissioners as evidence of compliance with Part 7 of the 2004 Act. However, a person claiming an interest deduction in the annual tax return must be able to indicate compliance with the Part 7 requirements at the time of making the return.
If a tenancy is registered late, the Revenue Commissioners adopt the following administrative practice as set out in its manual:
Interest relief that has been denied for a particular chargeable period because a tenancy was not registered by the return filing date for that period can subsequently be restored if the landlord avails of the late registration facility, subject to the usual four-year time limit on claims for repayment of tax.
The first amendment also specifies certain proof related to payment of management fees in multi-unit apartment complexes, while the second asks for a report on the tax deduction for such expenses. Apartment management fees are an allowable deduction against rental income under this provision, provided they are borne by the landlord. Clearly, an item of expense is not allowable for tax purposes if it has not been paid.
On the issue of claiming deductions for expenses not actually borne, I am advised by the Revenue Commissioners that whereas the vast majority of taxpayers submit accurate and timely returns and declarations, Revenue minimises the opportunities for those who might seek a competitive advantage through non-compliance by conducting an extensive programme of compliance checks each year. In 2018 Revenue compliance activity focused on, among other areas, the rental sector. There were 5,277 compliance interventions in the rental sector in 2018, with a total yield of €41.62 million. I am advised by the Revenue Commissioners that while audit interventions and yield per audit are accurately recorded electronically in each case, the current recording system does not support extracting data for yield by specific expense restricted.
Neither of the proposed amendments is necessary. Rental income is dealt with under the headin gof self-assessment and if a return was audited, the Revenue Commissioners would seek proof of payment of management fees and registration with the RTB to verify that a deduction was allowable.
I thank the Minister. If the note could be shared with the committee, it would be very helpful.
The Minister detailed in the reference to section 97(2I) of the Taxes Consolidation Act the connection between allowing the deductability of certain payments arising from purchase or repair of a property and it being contingent on a box being ticked on the form to confirm that a tenancy has been registered with the RTB.
That is welcome and I accept that requirement is there.
The issue the amendment focuses on relates to landlords claiming tax deduction for the annual management charges of fees paid to a management company. The Minister has acknowledged these are tax deductible. Yet, there does not seem to be any corresponding requirement for landlords who claim that relief to demonstrate that they have registered with the Residential Tenancies Board. Not every tenancy would result in interest deductibility being relevant. There may be no loan associated with a particular property, but the landlord could claim the tax deduction for the payment of the management fees. Does the Minister get the point I am making? I am referring to the connection with that as opposed to with interest deductibility. That is the issue this amendment raises.
The Minister suggested that to claim tax deduction for interest payments the landlord has to confirm that the property is registered with the RTB. That is accepted, but that is not the question I am raising under the amendment. The question being raised under the amendment relates to tax deduction for the payment of management fees to the management company by the landlord. The Minister has confirmed this is tax deductible, but landlords do not need to confirm that the property has been registered with the RTB to claim that tax deduction.
This is an effort to ensure that landlords pay the management charge to the management company. If there was a way of requiring landlords to have the tenancy registered with the RTB, it would help towards that goal. That is the purpose of the amendment.
That was not immediately clear to me from amendment No. 17 because the Deputy was looking for a report on the matter. Now that Deputy McGrath has explained it like that, maybe what we could do is consider the issue he has raised. At the very least we will write back to him or provide a note for the committee on the issue of why there is a link in the first issue but not in the second issue. Maybe we can see if we can consider it in advance of Report Stage. I had not understood the issue relating to this amendment but Deputy McGrath has now explained it.
I move amendment No. 20:
In page 20, between lines 24 and 25, to insert the following: “Report on restriction on tax relief for physiotherapy sessions
17.The Minister shall, within 3 months of the passing of this Act, prepare and lay before the Oireachtas a report on the feasibility of removing the restriction in which tax relief is only available for physiotherapy sessions on the basis of a general practitioner referral.”.
This amendment seeks a report, because that is the mechanism open to us, on the restriction of tax relief for physiotherapy sessions. I know this is an issue with which the Minister is familiar. People who avail of physiotherapy sessions can claim tax relief on expenditure if it is carried out by a registered practitioner under the legislation or if the person has a referral. However, in many cases people have to be referred by a general practitioner to claim the relief under the tax code. I am trying to tease out whether the Minister would be open to allowing tax deduction, as such, for people who go directly to a physiotherapist for treatment.
Tax relief in respect of health expenses is provided for in section 469 of the Taxes Consolidation Act 1997. "Health expenses" is defined in that section as "expenses in respect of the provision of health care...including the services of a practitioner." A practitioner is an individual who is registered in the register established under section 43 of the Medical Practitioners Act 2007 or the register established under section 26 of the Dentists Act 1985 or, in respect of health care provided outside the State, is entitled under the laws of the country in which the care is provided to practise medicine or dentistry there. In the case of physiotherapy, tax relief can only be allowed in circumstances where the practitioner administering the therapy is a qualified practitioner, as defined in these terms, or if the treatment has been prescribed by a practitioner, as defined in these terms. GPs, therefore, often act as an access and control point for the scheme of tax relief on health expenses. Treatment by a physiotherapist is dealt with in the same way as other treatments for health purposes in that to obtain relief the treatment must come within the terms of section 469 of the 1997 Act. If physiotherapy was allowed without the need for the treatment to be prescribed by a practitioner, it would inevitably lead to calls for other treatments to similarly qualify for relief and this could greatly increase the overall cost of the scheme. Given my budgetary constraints I am not predisposed to such a potential cost increase.
This is a broadly availed-of relief. In 2017 there were 486,200 claims at a cost of €172.5 million. The current legislation safeguards this tax relief and I do not propose to change it. For the reasons outlined I am not in a position to accept the amendment.
I thank the Minister for his response. The issue really is that people have to incur extra expense to get a referral. It involves going to the GP to get a referral to see a physiotherapist. Only then will any expenditure the person makes on physiotherapy qualify for tax relief.
I understand the budgetary constraints. What the Minister is saying is that there could potentially be knock-on effects. Presumably, the Minister will be concerned about self-referrals or people referring themselves for various therapies. Realistically, people are not going to do that for tax relief purposes. Tax relief is granted at the standard rate. Is that the Minster's objection to it? Is it because it would then have to be applied in respect of other forms of therapy?
However, the proposal would mean changing the way in which tax relief is administered, regardless of the reasons for which a person ends up getting the additional treatment. If we do not have some kind of gatekeeper in place, as we do now, since a patient can only get relief if he is referred by a GP, my concern is that we could end up with a considerable escalation in cost. Thus, the debate I am having with Deputy McGrath on physiotherapists could end up being applied by people who might seek acupuncture or other forms of medical relief but who might not do it without having to go to a GP first.
Deputy Michael McGrath has raised a valid point. I hear the Minister's concerns on the matter. In the real world many people go to the physiotherapist for necessary treatment but do not go through a GP. Requiring them to go through a GP costs them €40, €50 or €60 depending on which part of the country the person is in. That is the cost simply to be referred for physiotherapy. People involved in sports and so on regularly seek treatment but are unable to benefit from the relief. Will the tax relief make a difference to them in terms of whether they seek treatment? It is in place for a reason. It is in place because it is medical care. It is there for a reason. I think there is a strong argument in this regard.
I live in the real world too. In the real world this relief costs €172 million. My concern is that if we were to make it more broadly available, there would be very considerable cost consequences. There is merit in making it applicable only to a form of relief in respect of which a general practitioner acts as a gatekeeper, for want of a better phrase. This repeats an argument we have had. We are discussing making the relief applicable to physiotherapists. The demand would then be extended to other healthcare services that many citizens access without a visit to a GP.
A person can obtain relief if he or she visits a physiotherapist but only if he or she is referred by a GP. If we believe - I am using the word "we" loosely - relief should be available for a visit to a physiotherapist, we should not put barriers in seeking it. The Minister has acknowledged that no one is going to self-refer to a physiotherapist and pay 80% of the cost in order to get 20% back. If we believe the health outcome of a visit to a physiotherapist is a public good, why put that barrier in place? I am not suggesting the Minister is not living in the real world. If someone presents with a sports or similar injur, a GP will refer him or her to a physiotherapist but will charge a fee of €50 to do so. That is the problem and it creates a barrier to access. A lot of people will not visit a GP. They will go straight to their physiotherapist. They know their own body and know that they need treatment.
We have to start from a principled point of view. All we are doing is creating a barrier. There are very legitimate reasons to create barriers in availing of tax reliefs. However, I do not know how someone could scam the system, unless he or she was the son or daughter of the physiotherapist and it would have to be a big family to make it worth the money. I do not understand it. Deputy Michael McGrath is looking for a report on the matter. That suggestion should be given active consideration. What is the breakdown of the figure the Minister has presented for the cost of this relief? What portion is accounted for by physiotherapists? Does Revenue have that information or does it combine all of the figures included in the Med 1 claim forms?
It includes GP care, dental treatment and so on. I do not imagine that we are talking about a huge amount, but there is a barrier. As the Minister knows, people go to their physiotherapist. Some will not, but others, particularly those who are active or involved in sport, will go directly to their physiotherapist. This is red tape.
I will not speak at length about this section. I note that we are extending another tax relief through the living city initiative which has been bedevilled by delays and changes. Initially it applied to two areas and Georgian buildings only. It was then extended to six areas and all pre-1915 buildings were made eligible. The commercial element was removed and it was made available to landlords. The state aid rules came into effect and changed the whole initiative again. Throughout there has been an extremely low uptake. We are talking about 20 applications per annum. In the entire lifetime of the scheme there have been three applications in Galway. Is there a genuine case for continuing the scheme which is being kept on a lifeline? I remember the then Minister for Finance, Deputy Michael Noonan, saying some things worked and some did not, but this scheme was worth the risk. Is it simply not working? If so, why are we extending it? There has been a very low uptake.
I have considered that matter. We have seen an increase in interest in the scheme which is carefully targeted at a small number of areas in a small number of cities which we are trying to influence. Revenue has advised that 51 applications were received up to the end of 2016. Subsequent to changes made in 2017, a total of 177 successful applications have been made. Given the very small nature of the scheme and the fact that the number of applications has increased, I have decided that there is merit in extending it a little further.
I have no problem with the inclusion of the three agencies in Schedule 4 to the Taxes Consolidation Act 1997, but why is the tax status of Enterprise Ireland being backdated to 23 July 1998? This measure exempts State bodies from taxation and we are backdating it by 20 years. Moreover, why were the agencies not added to the Schedule before now? Why were they not added by way of a statutory instrument, as has been done in the case of other agencies? My concern is that one of the conditions of section 227 of the Taxes consolidation Act 1997 is that if a non-commercial State body has paid income tax, it is not entitled to claim it back when it is added to the list. Is that why this measure is being backdated by 20 years?
I move amendment No. 21:
In page 23, between lines 10 and 11, to insert the following: “(2) For the purpose of clarity such provisions will also apply to businesses with charitable status providing emergency medical services in the State but registered in the UK, which shall be required to re-register in the State following the withdrawal of the United Kingdom from the European Union.”.
This amendment concerns an issue that is close to my heart - the provision of air ambulance services in the countryside. As the Minister knows, the programme for Government contains a commitment to the establishment of a second air ambulance service in the southern part of the country. That happened earlier this year when a charity, Irish Community Rapid Response, established an aeromedical service based in County Cork. On average, the service flies 50 missions a month. This has taken pressure off the air ambulance service based at Custume Barracks in Athlone. Its objective is to ensure the air ambulance based at Custume Barracks can respond to far more emergencies in the midlands and the west.
To fund the operation of the service, Irish Community Rapid Response must raise €2 million per annum.
The service is provided by a UK-registered helicopter company. Post Brexit, that company will have to re-register in the Republic of Ireland in order to be licensed to operate here. A VAT exemption is currently in place in the United Kingdom. However, when the company registers here, it will no longer be able to avail of that exemption and communities across the country will have to fundraise for the 23% VAT on top of the €2 million it costs to operate the service. It is a challenge for Irish Community Rapid Response, ICRR, to raise €2 million a year. It should not be asked to raise another €500,000 on top of that just to pay a VAT bill. There is precedent on this issue. The Irish Coast Guard and the Royal National Lifeboat Institution, RNLI, are exempt from paying VAT. This charity and communities across the country are fundraising for a vital air ambulance service that is fulfilling a commitment set out in the programme for Government. I want an assurance that when this company re-registers here, it will not have to raise an extra €500,000 just to pay VAT.
The provision in section 22 relates to tax measures that are provided for in section 130 of the Taxes Consolidation Act 1997. The purpose of the amendments in section 22 is to ensure that thestatus quois maintained in relation to those tax measures or reliefs in the event of a disorderly exit of the UK from the EU. However, this has no bearing on the VAT treatment of goods or services received by a person, which I understand to be Deputy Naughten’s main concern. I note that Deputy Naughten appears to be concerned with the VAT treatment of helicopter services that are provided by a Cork-based air ambulance, which is run by the charity Irish Community Rapid Response. Deputy Naughten’s concerns appear to emanate from the fact that, post Brexit, the company operating the helicopter, which is currently UK registered, will have to register in Ireland and charge VAT on its supplies, meaning that Irish Community Rapid Response will be faced with an additional 23% VAT bill. I am advised that the ICRR is registered with the Charities Regulator in Ireland. Such charity activities are generally outside the scope of VAT and, therefore, many charities are not required to register for VAT or charge VAT in respect of the services they provide. Nevertheless, it is important to note that VAT is a tax on consumption which applies to supplies made by a person and not to supplies received by them. In this context, many charities incur VAT on the services they receive. This is a feature of the VAT system itself, and it is not possible under EU VAT law, with which Irish VAT law must comply, to introduce an exemption based on services received, nor to introduce an exemption based on the recipient of a service.
The Deputy will be aware of the VAT compensation scheme we have introduced for charities, which is administered by the Revenue Commissioners. This scheme seeks to reduce the VAT burden on eligible charities. Under this scheme, charities that are registered with the Charities Regulator can claim for VAT on any expenditure incurred in relation to their charitable activities, except where the charity is already entitled to a refund, deduction, relief or repayment of that VAT. The scheme entitles charities to claim a refund of a proportion of their VAT costs based on the level of non-public funding they receive. Where the total amount of eligible claims from all charities exceeds the capped amount, which is currently set at €5 million, claims will be paid on apro ratabasis. This scheme will ensure that charities are at least partially compensated for the VAT they incur on goods and services received in the course of their activities. Charities can submit only one claim per year. The scheme will reopen on 1 January 2020 for the submission of claims relating to expenditure in 2019.
I hear what the Minister is saying. This section of the Bill aims to maintain the status quoafter the exit of the United Kingdom from the European Union, as does this amendment. The Irish Coast Guard and the RNLI do not have to pay 23% VAT. The Coast Guard is a private organisation which operates on behalf of the State. The RNLI fundraises significantly across both this country and the United Kingdom. Irish Community Rapid Response has to raise a substantial amount of money on an annual basis. It has put that model in place and has fulfilled a commitment in the programme for Government. It has signed a contract with a UK-registered company and everything is currently in order. This particular charity is facing a substantial penalty of €500,000 in fulfilling a programme for Government commitment purely because of the United Kingdom exiting the European Union. All I am looking for is the maintenance of the status quo. This organisation did not go about this process for any reason other than to provide a service and ensure we have a rapid emergency air ambulance service across this country, which takes huge pressure off our ground-based ambulance service. It ensures people are treated quicker and get to hospital quicker. It addresses many issues we had due to the closure of many smaller hospitals across the country, yet it now faces a penalty of an additional €500,000 because the United Kingdom has decided to leave the European Union. We need to find some way to address this particular challenge.
We need more details from the Deputy on this because our understanding of this issue appears to differ substantially from his. The charity to which he refers will be treated in the same way as the Coast Guard. VAT is charged on services that are purchased. That is what happens with the Coast Guard and that is what will happen with this charity. We need to get more information from the Deputy to see whether there is a particular issue here which would help us understand the problem with which he is dealing. While he is correct that this section of the Finance Bill seeks to maintain the status quo for tax measures and reliefs, it does not have any bearing on the VAT treatment of goods and services received by a person. It is our understanding that the particular company to which the Deputy is referring will be treated in the same manner as the Coast Guard.
The difference is that the Coast Guard provides a service for which the State pays. In this case, as the charity does not have the competency to operate a helicopter, the cost and financial burden of meeting the relevant regulations would be phenomenal. It has therefore contracted a company from the UK to provide this service. As the company is based and registered in the UK, it is currently exempt from paying VAT. After the United Kingdom leaves the European Union, that company will have to re-register here in order to be licensed to fly in this jurisdiction, and will have to comply with Irish VAT law. As a result of that, the charity will have to pay an additional €500,000 for the cost of that service.
This is money that is fundraised in communities across the country. It is used, as the Minister knows, to provide a vital service that is needed. The ambulance service has not seen the investment that was long promised across the country. When smaller hospitals were closed, we were given numerous commitments about the provision of emergency ambulance services, which did not happen. Here we have a charity that is prepared to fill the void and fulfil a commitment given in the programme for Government. As a result of the UK exiting the European Union, it is facing an extra penalty of €500,000.
I accept it, but the Minister will quote again what he has just said to me. I do not dispute that what he is saying is absolutely factually correct. The difficulty is that the charity will not see the status quobeing maintained. The aim of the provision included in this section of the legislation is to maintain the status quo. My point is that that will not happen in this instance. Unless there is a change to the existing law, we will have this problem.
That is possible. We will have to discuss the matter further with the Deputy who could be correct. That is the truth of the matter. The consequence of what he is looking for could be that the charity might be treated differently from others registered in Ireland. From a VAT law perspective, the truth is we cannot do that. I do not want to engage in false pretences, but the consequence of what the Deputy is looking for might be that the company would have to be treated differently from others registered here. Given that we are referring to an individual company and now that the Deputy has explained it in the way he has, I will have my Department engage with him bilaterally on the issue to see if we can provide clarity on it before Report Stage. It is possible that we might not be able to do what he is looking for. However, before we can definitively say this, we should discuss the issue before Report Stage.
I move amendment No. 23:
In page 23, to delete lines 17 to 19 and substitute the following:
“(b) in section 172A(1)(a)— (i) in the definition of “dividend withholding tax”, by substituting “a rate of 25 per cent” for “the standard rate in force at the time the relevant distribution is made”,
(ii) by substituting the following definition for the definition of “tax reference number”: “ ‘tax reference number’ means— (i) in the case of an individual who is or was resident in the State,andthe Personal Public Service Number (within the meaning of section 262 of the Social Welfare Consolidation Act 2005) issued to the individual,and
(ii) in the case of a person, not being a person to whom subparagraph (i) applies, or other body who or which is within the charge to income tax or corporation tax in the State, the reference number stated on any return of income form or notice of assessment issued to the person or other body by an officer of the Revenue Commissioners, and
(iii) in the case of any other person or body, the reference number stated on any return of income form or notice of assessment issued, or any other reference number allocated, to the person or body for the purposes of income tax or corporation tax or any tax which corresponds to income tax or corporation tax, by the tax authority of the country in which that person or other body is resident for the purposes of income tax or corporation tax or any tax which corresponds to income tax or corporation tax;”,
(iii) by inserting the following definition after the definition of “tax reference number”:“ ‘ultimate payer’ means the company, authorised withholding agent, qualifying intermediary or other person from whom a relevant distribution, or an amount or other asset representing a relevant distribution, is receivable by the person beneficially entitled to the distribution as referred to in paragraph (a), (b), (c) or (d), as the case may be, of section 172BA(1).”,
(a) by inserting the following section after section 172B: “Obligation on certain persons to obtain tax reference numbers of persons beneficially entitled to relevant distributions
172BA.(1) As respects relevant distributions made on or after 1 January 2021—
(a) where the relevant distribution is made by a company directly to the person beneficially entitled to the relevant distribution, the company making the relevant distribution,and
(b) where the relevant distribution is not made by a company directly to the person beneficially entitled to the relevant distribution but is made to that person through an authorised withholding agent, the authorised withholding agent from whom the relevant distribution, or an amount or other asset representing the relevant distribution, is receivable by the person beneficially entitled to the distribution,
(c) where the relevant distribution is not made by a company directly to the person beneficially entitled to the relevant distribution but is made to that person through one or more qualifying intermediaries, the qualifying intermediary from whom the relevant distribution, or an amount or other asset representing the relevant distribution, is receivable by the person beneficially entitled to the distribution,(d) where the relevant distribution is not made by a company directly to the person beneficially entitled to the relevant distribution but is made to that person through one or more other persons who is not, or not all of, or none of whom are, a qualifying intermediary, the person from whom the relevant distribution, or an amount or other asset representing the relevant distribution, is receivable by the person beneficially entitled to the distribution, shall, in advance of the making of such a relevant distribution and in respect of each person who is beneficially entitled to such a relevant distribution, take all reasonable steps to obtain the tax reference number of that person and shall keep as a record that tax reference number, and section 886 shall apply in relation to that record as it applies in relation to records within the meaning of that section.(2) The ultimate payer shall ensure that Article 5 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) is complied with when the ultimate payer is fulfilling the requirements of subsection (1).”.”.
In the budget I announced a two-stage process to improve tax compliance focused on ensuring the correct amounts of income tax and USC are paid on the income from distributions, including dividends, of Irish resident companies. As part of the first stage in this process, section 23 of the Finance Bill increases the rate of dividend withholding tax from the 20% standard rate of income tax to a rate of 25% from 1 January 2020. The second stage of the process will be implemented from 1 January 2021, with the introduction of a modified dividend withholding tax that will utilise real-time data that are being collected under Revenue’s newly modernised PAYE system and allows a personalised rate of dividend withholding tax to be applied to each individual taxpayer. It is intended that the legislation for the new collection regime will be introduced next year in Finance Bill 2020, allowing Revenue time to engage with stakeholders who may be affected and to develop the new systems required to ensure the overall successful roll-out of the measure.
In order for the new system to be fully operational by 1 January 2021, the companies and intermediaries affected will need to have collected certain information in advance of that date. I am, therefore, introducing a Committee Stage amendment in Finance Bill 2019 to oblige Irish resident companies and intermediaries involved in the operation of dividend withholding tax to take all reasonable steps to obtain and keep a record of the tax reference number for each person beneficially entitled to receive distributions from 1 January 2021. The amendment will also require companies and intermediaries to comply with Article 5 of EU Regulation 2016/679 in the collection and processing of such personal data. The amendment is being introduced to give the companies and intermediaries affected sufficient time to collect the data and the first step to ensure the new regime will be fully operational by 1 January 2021. It is intended that the new regime will allow taxpayers to pay the right tax at the right time and significantly increase compliance levels of tax on income on distributions from Irish resident companies by further reducing the gap between the dividend withholding tax withheld and the final tax payable by the shareholders. I, therefore, recommend the amendment to the committee.
While I welcome the increase in the dividend withholding tax and the Minister is aware that I argued for the introduction of the tax in previous Finance Bills, it is very clear that many companies are not paying at the rate of 20%, as legislated for. I believe the Minister is on record as saying the average figure is about 15% on small holdings. We know that as a result of double taxation treaties and because of the ability of investors to reclaim dividend withholding tax, in some cases they are paying as little as zero. This relates to Irish real estate funds, IREFs. and also to real estate investment trusts, REITs. It is important to say that when REITs were introduced in Ireland, they were sold on a different basis than they are today. When budget 2013 was introduced - I was in the Dáil at the time - we were told: "The introduction of REITs may also assist NAMA in deleveraging its portfolio and allow it to bring more sustainable activity to both the commercial and residential property markets." It was suggested it would allow ordinary persons to invest in a portfolio - persons who would not usually be able to invest - and that their investment would be not safe but safer as a result of the putting in place of the REIT structure. In reality, we know that that is not what is happening. We know that there has been a huge property plunder taking place in the past few years. Three REITs were founded in 2013 and 2014 - the Hibernia, Green and IREF REITs. There is also the fledgling Yew Grove REIT that was established last year. The level of market capitalisation of the REIT sector between 2013 and 2015 rose from €874 million to €2.5 billion. As of three months ago, before the sale of the Green REIT, property portfolios were valued at €3.7 billion. Is that figure accounted for by the structure that allows the ordinary person to invest?
In reality, that is not what is happening. We see what is happening from the analysis done by the Central Bank, which is that the investors this year are not like Joe Public, as had been claimed before 2013. There was intense lobbying on the setting up of the REITs structure at that time, and serious players from property, investors and industry lobbied extensively from 2011 for their introduction. Representations were made to the Department of Finance, the Central Bank and the Irish Stock Exchange, and high-profile public meetings were held. Senior National Asset Management Agency, NAMA, officials publicly endorsed the introduction of REITs, and a number of lobbyists ended up working for some of the bodies, particularly NAMA where they managed portfolios that were eventually sold to newly founded REITs.
What we were told at that time is not what has happened. The majority of REIT shares are not held by ordinary Irish people but by investors outside Ireland, the two biggest being domiciled in Luxembourg and the Netherlands. This means that when distributions take place, as they have to, they take place where the dividend withholding tax will apply. Theoretically, they are supposed to pay at 20%, but in reality, people with small holdings pay 15% and, in many cases, because of double taxation treaties and other measures, they are able to pay zero. We need to tighten up on this, and while the Finance Bill tightens up on it to a certain extent, it does not go far enough. When I argued for a dividend withholding tax of 20% as an introduction, I said that figure would need to increase to 33%, which is what capital gains tax is at this time.
We have the same situation with IREFs. The total asset value of the Irish funds industry was €4.2 trillion in 2018 and IREFs benefit from an enjoyable tax treatment in the form of the gross roll-up regime, which means there is no taxation within the fund regardless of the assets and the accumulation of value within the fund. Taxation is only applied to distributions and we apply the dividend withholding tax of 20% because the vast majority of shareholders are non-resident. They can also reduce this 20% substantially. It is going in the right direction to change the rate to 25% but it should go a lot further and capital gains tax should be applied to these assets. My amendment proposing to change the rate from 25% to 33% has been ruled out of order, but the Minister needs to give serious consideration to it. There are also serious questions relating to REITs, though I welcome some of the moves we will deal with later. They were about to pull a fast one and I will address this in more detail in the context of what we put into the Finance Bill two years ago.
The tax nature of these structures is causing problems and we cannot allow these funds to be exempt from tax on rent, from capital gains tax inside the fund, and from income tax while we only apply a withholding tax that they can reduce. This has a huge effect as they have been buying up properties in what is an ongoing property plunder. In five or ten years we will look back on this and ask how the Government allowed it to happen. What some of these funds are doing is absolutely scandalous, as is the fact that we are benefiting from it through the tax code.
Some of the Deputy's points are better suited to the discussion on section 28, which begins to deal with the taxation of REITs, IREFs and so on and which will take place later tonight or tomorrow. In regard to the dividend withholding tax, the anchor of 25% is to try to make it equivalent to where we would be from the point of view of income tax, where there is a 20% rate and a USC rate of 4.5%. It is more in the nature of a compliance measure than a new policy measure because I am trying to make sure that the tax that should be paid as dividend withholding tax is paid. The Deputy asked if the dividend withholding tax was paid in all REITs or IREFs, and he is correct that the tax is reduced further for those that receive income in other jurisdictions with which we have a tax treaty, which is a factor behind the levels of tax that are being paid by some who receive income from REITs.
When I sat in front of this committee a year ago, I said I would do two things. First, I said I would get the Department of Finance to do some work for me to help us form a view on the impact these entities are having on the property market. That was done and the findings were published. Second, I said I would act on any advice in the aftermath of the Revenue Commissioners getting data on the levels of tax that were being paid. I have done this with some of the changes I brought in on budget night. Some of the behaviours and some policies that are being followed have to change, and that is why I am making the changes. Some of the provisions of the Finance Act 2016 were introduced with particular objectives in mind, but I have become aware of the extent to which the objectives have not been met so I am changing the law to deal with that. The Deputy may feel I should go further, but I believe the actions I have instigated in this Bill are powerful enough to deal with my absolute expectation that the entities that we are discussing pay taxes at the levels we expect. I will keep this under continual review, particularly in the area of the operation of IREFs.
I acknowledge that there is progress here and I acknowledge the piece of work the Minister has done, which was as a result of an amendment I tabled to the Finance Bill this time last year. The year before, we had met departmental officials and they were very helpful in looking at the introduction of a dividend withholding tax at 20%. On many occasions, I have raised the issue of the tax that is being paid by these companies. While it is right that the Revenue advises the Minister on this, some of the filings of these companies are publicly available. It is very clear that some of these companies are paying effective rates of as low as 3%. My frustration is that we are always two years after the issue. This may be dealt with next year, but in the meantime, these funds are not sitting back but are gobbling up a huge amount of property and they have billions of euro of Irish property in them.
Later on, we will raise issues relating to the stamp duty effect.
Last year, in the Finance Bill, I argued for an anti-avoidance measure whereby a company that derives its profits from shares in property would not be able to avail of the 1% stamp duty rate. We understand, however, that the REIT involved in a sale will be able to do just that. This raises serious questions. While we are making some progress in this regard, time is of the essence because these guys do not sit around.
The Minister stated that we need to make sure that these entities pay the appropriate level of tax but what is the appropriate level of tax? These companies should pay capital gains tax and should not be exempt from the tax. That is a frustration for me. The exemption does not make sense, as the Green REIT sale brought into clear focus. All the gains the company made were to be valued on the day of the sale, which meant there were no gains whatever based on the acquisition value. It is not about whether these entities are subject to a tax rate of 20%. The question is what level of tax they pay. We can set the rate at 20% but these entities will not pay 20%. They are institutional investors, not Joe or Mary living in Blackrock, Gweedore or Caherciveen. They are institutional foreign investors. They do not pay income tax as we know it because they are not resident in Ireland. These institutional investors will be hit by the 20% dividend withholding tax but will reduce their tax bill, as the Minister has acknowledged, because of double taxation treaties.
How do we deal with that issue? We can increase the rate of tax and the Minister has increased the rate of tax to 25% and set out his arguments for doing so. There is no reason not to link dividend withholding tax with capital gains tax because these funds do not pay capital gains tax. Why is the dividend withholding tax not set at the same rate as capital gains tax, as Sinn Féin argues? That would not fully solve the problem because there are other ways in which these investors can reduce their tax bill and pay a lower effective rate.
There is a burning question in terms of policy. I spoke about the lobbying that took place at the time and how REITs were being sold. The impact can now be seen. The tax status of these funds are without doubt allowing them to push up property prices. There is no way that a company could afford to buy the type of property that these funds are purchasing in Dublin, for example, apartments costing in excess of €500,000, if it was not for the nature of the tax structure. It would otherwise be impossible and impractical to do so. It is not their fault they are doing this. It is our fault that they are doing it because, as a Parliament, we - again, I use the term "we" - are deciding to give them this tax benefit and structure. When these entities buy properties at such prices, they set a level in the market that others then chase. This is having a huge impact. It is wrong and does not benefit us. At the time, it was argued that these funds would help NAMA and allow for the ordinary Joe Soap to make safe investments in a diverse property portfolio. That has not happened. Instead, serious pressure has been put on individuals and Ireland's reputation has been damaged.
I welcome the amendment in terms of making sure that the companies which have to pay the tax are given reference numbers and so on. The level of tax, at 25%, is what we are discussing in this section. The Minister has argued that the rate should be aligned with corporation tax and USC. It should be aligned with capital gains tax. We are talking about property and these funds do not pay capital gains tax whereas all other companies have to pay capital gains tax.
It is important to put into context the scale of these REITs and the effects they are having on markets. I am using information that is available from the Central Statistics Office. Its figures indicate there are approximately 126,000 apartments in Dublin and 210,000 apartments nationally. Residential properties owned by REITs account for 2.38% of the total Dublin apartment stock and 1.4% of national apartment stock. Figures on the ownership types in respect of tenancies show that, despite the growth in the scale of REITs which I acknowledge, the top 20 landlords in the country, including the different entities and institutional investors we are discussing, still account for around 3% of total tenancies in Ireland. I take a different view from the Deputy. While I acknowledge these entities have scale, on the basis of the figures I have shared with the committee, their scale and influence is lower than the Deputy has argued.
Let me finish. In relation to chasing things, most of the key measures I introduced were implemented on budget night via resolutions. I decided that the appropriate way of dealing with this matter was to do so immediately. Many of the measures that we may discuss later were implemented on the night of the budget. I accept the Deputy's point that when addressing issues such as this, one can spend time chasing the issue because by the time one has dealt with the issue, something else will have taken its place.
On change within the sector overall, I repeat the point I made on budget day. Entities such as these can and do play an important role in creating greater diversity in the building and purchase of commercial property and apartments. I have certain expectations regarding how tax is paid in this sector. My Department and I will keep this matter under review in the run-up to the next budget and Finance Bill.
To explain my view that the Minister has missed my point, while I do not doubt the figures he has supplied, not every apartment is for sale. We have to look at the impact these companies are having on what is available in the market. It is not just what is available but also what is about to become available because these entities are buying properties off the plan. In terms of what is available, they have a big slice of the market. As I said, a REIT is now the biggest landlord in Ireland and these funds are increasing in size.
We need landlords - that is not an issue - but normal companies operating under normal company rules would not be able to do what these REITs are doing because their business model would break. They would go into liquidation and fail because they would not be able to buy apartments for €540,000. Any accountant would tell us that would not add up. The only way the REITs are able to do that, and the reason we see headlines about the purchase price paid for some properties, is through their tax structure. When big boys that can unleash that type of money enter a market in which there is not a huge amount of availability, it will obviously have an effect. The only way these entities can do this is because of the tax structure. They would not be able to do it if they were normal companies. Normal companies registered in Galway, Dublin or wherever else cannot do what REITs are doing as they would be subject to all of the other taxation measures from which REITs are exempt.
As I said, we are moving in the right direction, albeit slowly and painfully, but the Minister is chasing his tail. There is a bigger question here in terms of the types of funds that we have now operating in the property market and the taxation structure that allows them to do what they are doing.
We can discuss this further when we debate the appropriate level of capital gains tax to be applied. I repeat the point I made regarding the number of measures I brought in on budget night to ensure they were immediately implemented. I take the Deputy's point that we should look at the share of what has been purchased.
In parallel to looking at that, it is also the case that by forward purchasing particular forms of development, these entities make it more likely for that development to be built. That is something we need to take into account in looking at this issue. The Deputy draws a comparison between a "normal company" and a REIT. At the same time, the REIT also has requirements on it that a normal company does not have. For example, a REIT is required to distribute out its income in the way a normal company is not. A REIT has a debt limit requirement in a way a normal company does not. I have introduced many changes in this Finance Bill that will affect REITs that a normal company will not be subject to either.
A company has to pay income tax on its rent. REITs do not. A company has capital gains tax to pay but REITs do not. They have to distribute a certain portion of their income or of their proceeds. The structure of this is the investors are foreign investors and, therefore, are only subject to dividend withholding tax that in some cases they are reducing to close to zero. This is why we are discussing the issue of what the dividend withholding tax rate should be because we are dealing with this part in isolation. The Minister mentioned we are dealing with what the appropriate rate of capital gains tax is but I would like him to clarify for me if he is suggesting that he will apply capital gains tax to a normally functioning REIT.
That is the point. They will not be subject to capital gains tax. We go back to the point that if they will not be subject to capital gains tax, then it is property that makes up REITs. They are not buying shares in Apple or Google. It is property that is making up REITs and, therefore, they derive the dividends they are disbursing as a result of either the rent roll they are getting from the fact that these are now some of the largest landlords in the State or the fact there is acid appreciation within the structure. Of course we should be applying capital gains tax. I have beaten this issue so we might come back to it next year and the Minister might agree with me on it one year later.
I am aware of what the risks of scale are and that is why I have worked to try to measure what the scale of these REITs and IREFs are now that they have been in place for a while. I have given the Deputy some figures here, he has made a fair pushback on those and I will have a further look at that. However, we did a piece of work to look at the scale of these entities. I am also aware of the potential effects of tax policy on demand in the marketplace. I understand that. We are all painfully aware of what happened the last time credit was a catalyst to things that happened in the property market that we are all searingly aware of but I am aware that credit is not the only catalyst to incentives in the property market. I get that. As Minister for Finance, I have to act in a way that I believe is proportionate and that reflects the expectations the State has on how tax is paid. That is what I am aiming to do with the changes I have made. The Deputy believes they should go further but he acknowledges changes that have been made. I believe those changes are at the right level.
I have some questions on this section. The Minister signalled on budget day that from January 2021 he would seek to bring in a modified dividend withholding tax regime, using real time data collected by Revenue under the new PAYE modernisation programme. It was signalled that could involve a personalised rate of dividend withholding tax for each individual taxpayer. Can the Minister confirm he is not legislating for that now and that it will be in next year's Finance Bill? In arriving at a personalised rate of dividend withholding tax, I would assume, for example, that that could be a rate of zero for certain qualifying non-resident investors. Will this work be conducted over the course of 2020? What will it form part of?
I move amendment No. 25:
In page 24, line 36, after “amount” to insert “or pursuant to section 766C(4)”.
I propose to take amendments Nos. 25 to 28, inclusive, together. Section 24 of the Finance Bill 2019 provides for several new measures to encourage micro or small-sized companies to undertake research and development activities and avail of the research and development tax credit.
One of these new measures provides for micro and small companies to submit pre-trading claims for the research and development tax credit, which is limited to offsets or repayments calculated by reference to payroll taxes and VAT liabilities for the same period. A technical amendment is necessary to ensure the existing clawback mechanism for research and development tax credit claims, and the standard penalty regime, will apply correctly in the event of an overclaim in respect of this new measure for pre-trading claims. I commend these amendments to the committee.
It may be of assistance to committee members if I now read the speaking note for section 24, which summarises the changes being introduced to the research and development regimes in this Bill. I will also circulate the speaking note to the committee in advance of Report Stage. It is the third speaking note we have agreed to circulate.
Section 24 of the Finance Bill amends the provisions of the Taxes Consolidation Act to provide for the research and development tax credit and for an accelerated capital allowance for expenditure on scientific research. The primary policy objective of the research and development tax credit is to encourage companies to undertake high value-added research and development activity in Ireland, thereby creating high-quality employment and investment. During the year, as part of the Department's initiative of focusing on tax incentives for smaller firms, a public consultation on the research and development tax credit was carried out. As a result of this, I am pleased to say this section provides for a number of enhanced supports for micro and small companies to encourage greater uptake of the research and development tax credit by smaller firms.
The rate of the research and development tax credit for micro and small companies will be increased from 25% to 30%. In addition, an enhanced and simplified method to calculate the payable element of the research and development tax credit based on twice the current payroll liabilities is being introduced. I am also providing for pre-trading claims to the research and development tax credit, limited to offsets or repayments calculated by reference to payroll taxes and VAT liabilities for the same period. These measures for micro and small companies are subject to a commencement order pending approval.
I am also making some amendments of general application to all claimants. The limit on outsourcing to universities or institutes of higher education will be increased from 5% to 15%. This will support the Government's policy of building the knowledge exchange system between industry and the education sector.
The section also provides for a number of amendments to improve the overall efficiency and administration of the tax credit. With regard to section 765, these amendments limit the availability of buildings accelerated allowances to buildings or structures, the construction or development of which is scientific research. It also provides that where a company may qualify for a scientific capital allowance and the research and development tax credit, both reliefs cannot be claimed in respect of the same expenditure. This is addressed as an anomaly in legislation identified by Revenue.
I welcome the proposed changes and the section as the Minister intends to amend it. With regard to state aid approval, is the timeline similar? These provisions will be the subject of a commencement order. Is the Minister looking at making the submission to the European Commission once the process is complete? Are we looking at four months into the year before this will be enacted?
I move amendment No. 28:
In page 25, to delete lines 14 and 15 and substitute the following: "(ii) in paragraph (c)—(I) by substituting the following subparagraph for subparagraph (i):"(i) Subject to subparagraph (ii), where a company makes a claim in respect of a specified amount or pursuant to section 766C(4) and it is subsequently found that the claim is not as authorised by this section or by section 766A or 766C, as the case may be, then the company may be charged to tax under Case IV of Schedule D for the accounting period in respect of which the payment was made or the amount surrendered, as the case may be, in an amount equal to 4 times so much of—and(I) the specified amount, oras is not so authorised.",
(II) the amount pursuant to section 766C(4),
(II) by inserting the following subparagraph after paragraph (ii):".
I welcome the section. Last year, I tabled an amendment asking for the relief to be increased from 25% to 30% for small businesses. The Acting Chairman may take note of this as he said on television that none of my suggestions is ever taken on board.
I welcome this support for small and micro businesses. We have debated quite a bit the distribution of the research and development tax credit. The wider issue is that we need to look at what is happening in terms of small and medium enterprises and micro enterprises here. They are not productive enough and I hope this move will be a support.
Last year, I also asked for what we referred to as a research and development light application process, similar to what is in operation in the North. Has that been legislated for? One of the concerns of companies is that going through the process is very cumbersome and difficult. They go through the same process as some of the multinationals. There is also a risk with regard to clawback. I ask the Minister to clarify this.
We have not introduced the process the Deputy has described that takes place in Northern Ireland. We have tried to make a number of changes to make it easier for these smaller companies to apply for the changes we are making, but the broader changes to which the Deputy referred a year ago are not part of this in terms of the application process. Of course, if I had said "Yes", God knows what trouble I could have got into with the Acting Chairman, but that is not the reason we have not done it.
To address the Deputy's broad point, in recent days the Minister, Deputy Humphreys, published an OECD survey on entrepreneurship in smaller companies in our economy. I am sure the Deputy is aware of it. It points to two issues of concern to me. The varying productivity levels in our economy are now becoming quite pronounced. We have many different companies at the very frontier of productivity, not only in Ireland but throughout the world, because of the nature of what they are doing. We have another cohort of companies that tend to be indigenous and smaller, and not only are they significantly behind the first group, as one would expect, they are behind the average. We are going to have to find a way to address this. I hope that what we are doing here will be part of the answer, although there are a number of measures we will need to continue and new measures we will need to take.
I want to see and encourage more and more of the people working in the very large companies at the frontier of productivity and new forms of technological development in Ireland setting up their own companies in Ireland. I am seeing encouraging signs of this happening, but we have a way to go. What is driving the changes that came out of the public consultations we did earlier in the year is trying to find new ways to provide smaller and micro companies with an opportunity to get at least some of the supports that tend to be associated only with the very largest companies.
As I said, I welcome the fact we are moving to 30% for the research and development tax credit, which will partly address the issue, because the more of our smaller micro companies that are involved in research and development, the better. Is there a particular reason the Department did not look at the system in the North? Perhaps it did look at it. It uses a different template and process for applying for the credit. Why it is not being introduced in the Finance Bill? Is it something the Minister will keep under active consideration?
As a result of talking to businesses and business representative bodies, I am aware that this is one of their concerns. Maybe that is flagged up in the consultation. I am not sure since I am not familiar with the report. It is being said to me directly. Those who administer applications for research and development for companies on both sides of the Border will state that the process here is difficult and challenging compared with that which applies in the North.
One of the key areas of difference between the Republic and Northern Ireland is the degree to which it is possible to gain some of the research and development tax credit up front. That could be one of the matters to which the Deputy is referring. I understand that Her Majesty's Revenue and Customs is beginning to review the nature in which some of its credits are available up front, because it wants to ensure that credit is being drawn down against activity that meets the definition of the activity the credit is for. I am happy to look at the roll-out of this. We have made other changes over time, especially to the KEEP scheme, which we brought in with the explicit objective of trying to benefit smaller companies. It has turned out that the drawdown has been some way short of what we expected. We will monitor this over the next year and if there are any lessons in respect of how it is being drawn down on which we need to act. I am sure that I, or the Minister for Finance of the day, will do so. The issue of how we can ensure that more of our smaller companies are engaged in higher-value research and development activity will be a significant area of focus. We will have to keep the roll-out of this change under review. If further changes are needed, I am sure they can be examined.
One point that has been made is that for a small or micro-company involved in research and development and claiming this credit, there is a clawback scenario that can occur. If that company, which is not trying to scam the system, falls foul of the technical rules, that clawback could have a serious impact on it. The suggestion is that many of them just stay away from it because the risk is too great. If the company thought that it was availing of this and then found that it was not entitled to it after spending money on what it believed was eligible research and development activity, it would have a detrimental impact on the company, given the size and nature of the small and micro-companies that we are talking about. Is that something that has concerned the Minister or been raised? I ask him to keep this under consideration. We are moving in the right direction but we need to go a bit further because, as the Minister acknowledged, we are way behind the curve in some areas. I made the point before that while every bit of foreign direct investment is welcome, if we stripped that away from the Irish economy, the picture behind that does not look too pretty. Some of it is excellent but some is not pretty when measured against our competitors.
Some is excellent but there are other parts that have some distance to go with regard to productivity. Clawback is not an issue which has been raised with us in the consultation seminars that we have done or the engagement that I have had with my team about it. A clawback provision is in place if the credit ends up not meeting the needs that Revenue has for it. We will have to keep this under review. It is an important departure from research and development tax credit policy and it is justified. My intention is that the share of value that smaller companies have of the total research and development tax credit will increase. We will have to see how that works out over the next couple of years.
I move amendment No. 29:
In page 27, to delete lines 32 and 33 and substitute the following: “(a) in subsection (3)—(i) by substituting “B-A” for “A-B”, and(b) in subsection (4)—
(ii) by substituting “is the greater of” for “is the lesser of”,
and(i) by deleting “(in this section referred to as the “relevant issue”)”,
(ii) by substituting “B-A” for “A-B”,
(iii) by substituting “is the greater of” for “is the lesser of”, and
(iv) by deleting “before the relevant issue”.”.
Amendment No. 29 is a technical amendment and is necessary to ensure that formulas provided in Part 16 of the Taxes Consolidation Act 1997 to allow companies availing of employment investment incentive, EII, correctly calculate the element of an investment that may be in excess of the limits permitted under the existing legislation. The purpose of the formula in section 497(3) is to enable a company availing of EII to identify an amount that would be in excess of the annual allowable investment limit of €5 million such that the excess would not be a qualifying investment. If a company was to use the formula as it stands, it would never result in an excess being identified. This is incorrect, as an excess will always exist if the aggregate investment in a 12 month period is greater than €5 million. The amendment will correct this and will allow a company identify an excess that may exist.
Similarly, the purpose of the formula in section 497(4) is to enable a company availing of EII to identify an amount that would be in excess of the lifetime allowable investment limit of €15 million, and once more than that, the excess would not be a qualifying investment. In light of the current formula, if this was to be implemented in practice, an excess would not be identified. The proposed amendment seeks to correct this by ensuring that Revenue looks at the greater of the lifetime limit or the total investments made, therefore ensuring, should it exist, that an excess is identified.
I take this opportunity to inform the select committee that I intend to bring forward an amendment on Report Stage to modify the current requirement in the Bill that an investor must hold EII shares for ten years or more in order to avail of tax relief on a maximum qualifying investment of €500,000.
On amendment No. 30, EII is a state aid measure operating within the European Union's general block exemption regulations and as such, it applies to all regions in the State. A regional variation of EII would require separate state aid approval from the European Commission. The package of measures that I have brought forward is meant for all regions of the country. While I absolutely appreciate the importance of the EII scheme to the midlands, I am also aware, as Deputy Denis Naughten's amendment identifies, of the very particular challenges that peat regions are facing in the Deputy's constituency and others in the midlands. I hope he is aware of the efforts that we have under way to deal with some of that, some of which will be funded by the change in carbon pricing. I cannot vary the effect of the EII scheme based on county.
I thank the Minister for his comments. I know that this matter is close to the Acting Chairman's heart. My amendment seeks to provide an enhanced tax relief for job creation in the midland counties that have been directly impacted by the cessation of turf cutting. Those counties include Roscommon, Galway - the eastern part - Longford, Offaly, Westmeath and Laois. The EII should probably be examined.
I accept that the current scheme is a broad one covering the whole country but I believe we should consider making a separate State aid application in respect of the affected counties in light of the significant employment losses they face. Effectively, the Dublin equivalent of the decision being made in the midland counties would be Google deciding tomorrow morning to pull out of Dublin lock, stock and barrel. That is the scale of the impact across the middle of the country. The big difficulty is that if Google moved out of Dublin tomorrow morning, alternative enterprises would come in to fill the void very quickly. This is not the case across the midland counties.
We recognise the challenges in attracting foreign direct investment to our region, including its towns. The best way we can support the indigenous economy is to support existing businesses in expanding and encourage start-up businesses to locate in our counties. We face 2,000 direct job losses in 33 days time. The PSO for Lough Ree Power will expire on 9 December and it will expire on 31 December for west Offaly power stations. Approximately 2,000 indirect jobs across the midland counties will be affected.
I accept the Government's support and investment. I publicly welcome it and thank the Minister for his engagement in that regard. The reality, however, is that the State will never be able to put in resources at the scale needed to compensate for the job losses. While we can provide incentives and create the necessary environment, and while the fund being put in place to provide the required seed capital is very welcome, the reality is that we need to deliberately encourage private sector investment across the counties. The only way we can ensure that investment takes place in our region, rather than in the congested Dublin area, is to put some type of incentive in place. As the Minister knows, the region has been accepted as part of the EU coal regions. It is receiving a special designation and recognition at EU level. From my engagement with the Commission and having been a member of the Council of Ministers, I am aware that there is a sympathetic view of and approach to the coal regions and the peat region in Ireland. I accept there cannot be a major differential in supports in various parts of the country but I seek small alterations to the EII that would ensure an investor considering where to invest would actually think of the midland counties first. I refer to supporting indigenous local businesses first rather than adding fuel to the economic fire in Dublin. This could help to provide some of the counterbalance needed away from the city of Dublin because of its housing and congestion problems and commuting challenges.
Within the taxation system, we need to acknowledge the challenges faced across the midlands in replacing the jobs about to be lost in Bord na Móna and in addressing the longer-term impact on existing businesses. There is a need to ensure that we provide jobs not only for those in Bord na Móna today but also for the next generation. Taking action in this regard could result in some emigrants from the region coming back and taking up a job if it becomes available, or perhaps starting their own businesses. A small alteration to the EII would be very positive. What I am looking for is a report. A report is needed on some types of taxation supports that would encourage private investment in the midland peat counties. I am open to suggestions but it is important to consider a unique taxation approach.
I acknowledge the difficulty some communities and workers are now facing as we see a profound change in the nature of work and a big change to the level of employment available. It is also a concern of Deputy Burke, as with many of his affected Oireachtas colleagues. To be blunt about it, the Deputies know I cannot make a change to tax policy that is geography based.
Yes, in the past. Look what happened. The Deputy knows I cannot say there will be a particular tax rate or change for one group of counties and not for others. I simply cannot make taxation, particularly taxation related to the creation of income and employment, county specific because every neighbouring county would quickly claim it wanted the same arrangement and that it was being penalised. The dominoes would begin to fall. What we can do is prioritise expenditure, and that is what we are doing. We are prioritising the need for a fair and effective transition for the workers the Deputy represents who are now losing their jobs. It is far more effective for us to be prioritising the use of resources through expenditure. We can control and target that. The Deputy will be aware of our thinking on how we propose to upgrade the energy efficiency of homes in the midlands, particularly local authority homes. I am sure the Deputy will play a part in influencing it. He will be aware of the work and thinking on what can be done with the peat plants that may no longer be used in the way they have been. The Deputy is a former Minister, not to mention a public representative for the area in question, so he will be aware of the expenditure-related work that is under way to make progress on all these matters. The communities he represents will play a role in influencing what we are seeking to do in the area. I cannot even pretend that we are going to have tax measures that will relate to particular counties. I have many other colleagues in the Oireachtas representing constituencies they know they will soon face the challenges faced by Deputy Naughten. If I were to make tax policies specific to the Deputy's county, I would be in an untenable position. All my Oireachtas colleagues would seek the same for theirs. I understand the Deputy's desire to prioritise investment and change in particular parts of the country, including his, but I hope he can see the case for doing so through expenditure rather than tax measures.
I thank the Minister. I hear exactly what he is saying. I accept and welcome the fact that there is expenditure in our region. We are, however, talking about the equivalent of Google leaving Dublin. The reality is that while the public expenditure is very welcome, it will not deal with a problem of the scale in question, not only in terms of the imminent threat to the economy but also in terms of the long-term outlook. All we have to do is consider what happened in the valleys in Wales, which have become a rust bucket. The same is happening in the United States. The Minister will have seen the impact on the coal areas in the United States. From his Council of Ministers colleagues, he will have heard about the political challenges faced in the coal regions right across Europe in dealing with this issue.
We have an opportunity in Ireland to lead by example and to show how we can provide that just transition. However, to do that, we all must accept that we need to stimulate private sector investment across those counties as well. We cannot solely rely on public sector expenditure in those areas to protect the many jobs that will be impacted. We need to drive innovation and support the growth in employment in local small businesses.
I am asking that we would have a report to see how we could provide some innovative support. I do not want a situation where, for argument's sake, we take funding or investment away from north Tipperary and bring it to County Offaly. That is not my intention. I am not talking about a major differential. The reality, however, is that the employment investment incentive currently applies to the city of Dublin, where we need to calm down the economy and not add to the problems of congestion, housing, office accommodation and, now, even water, given that the Dublin area is experiencing in terms of water quality what we experienced for six years on the trot without any break. Those infrastructure challenges that are in Dublin do not exist to the same scale in the midlands. However, we require investors who want to invest to look to the midlands first. I am suggesting that we nuance that support to ensure people would consider that first.
I do not believe I am being unfair in asking for a report to look at the potential options. This happened in the past. While I accept mistakes were made in the past, some very good decisions were made as well. Very close to us here in Dublin, I think of the Irish Financial Services Centre, IFSC, which was established on that very basis of geography. We should not throw the baby out with the bathwater. I ask the Minister to reconsider this amendment in advance of Report Stage.
On EII more generally, I have two questions. The first concerns the 40% that is to be claimed upfront in year one, as opposed to 30%, and then the 10% in year three. The 10% in year three was subject to conditions laid out by Revenue in terms of research and development and job creation. Do those conditions still apply and, if the relief has been paid out in year one, is there a clawback mechanism and how does it work?
The second question is in regard to the consultation that was carried out, and this was included in the tax strategy papers. Obviously, they looked for the 40% upfront and they also argued for micro support to mirror the seed enterprise investment scheme, SEIS, in Britain, which provides 50% for micro companies, given the volatility and higher risk in regard to start-ups. I am interested to hear about this.
Last year, I brought in an equivalent of this for very small companies, which I am informed is called the SEI and which is now in place. I can give the Deputy a note about its operation in advance of Report Stage. It has only been in place for one year.
The micro support is the same as the EII. One of the four points that came out of the consultation, however, was that there should be the introduction of a micro SME similar to the UK seed enterprise investment scheme, including an enhanced investor return of 50%. The British one provides a 50% return and exempts the shares from capital gains tax, which is to do with the higher risk of investing in a micro company as opposed to an SME. It is not something I am really arguing for. I am just interested in the consideration of that.
I was aware of it. When we were making decisions in regard to the EII scheme, further changes were needed. The issue the Deputy is referring to was brought up in the public consultation, but my view is that, given we had introduced the SEI scheme last year, I want to see how that is going to work before I decide if further change is merited for the EII scheme.
While we seem to be making changes to the EII scheme every year, there were significant changes to the EII scheme in last year's Finance Bill, not in terms of its rates, but in terms of the process, the application and streamlining in general. This followed quite a bit of criticism, it is fair to say, from some companies and sectors in regard to delays, documentation, getting approval and so on. Now that has been up and running for a year, has there been an assessment of whether all of those issues have been ironed out so we are not seeing companies waiting 12 or 14 months or experiencing the challenges they were reporting?
There have been improvements. I am not receiving the same level of complaint in regard to the operation of the scheme that I was receiving before the changes in last year's Finance Bill. It has improved. There is still a gap, however, in terms of explaining to companies the effect of the changes we brought in last year. We still have work to do to explain what those changes are and explain to companies that this is a scheme they might be able to benefit from. While it has got better, we still have work to do.
In response to Deputy Naughten, there is no point in my being dishonest with him and committing to do a report that I am not going to do. I am not going to be dishonest to either him or the committee in that regard. If I make a tax change for part of the country, as the Deputy can appreciate, there will be a knock-on effect in that other counties will look for the same. Even if I wanted to do it, from a state aid point of view, I would not be allowed to make a change on a level below our country. Even if I wanted to do it, which for the reasons I have explained I do not, I would not be able to do it.
That said, given the analysis the Deputy has put forward in regard to the needs of those counties, I accept his argument. There is little difference between the Deputy and me on the analysis. With regard to the point he made that this is the effect of Google withdrawing from those counties and the fact we do not have another Google to replace it with, I accept his argument. However, this is the reason that, in the change to carbon pricing we have made, nearly €1 out of every €3 of new money that will be raised by the higher level of carbon pricing is now being prioritised in line with the need for transition measures. The counties the Deputy is referring to are the ones in which we are going to begin this work. I cannot offer stronger evidence of our commitment to trying to respond to the needs he is raising than the degree to which we are prioritising the first year of carbon pricing revenue to deal with these issues. I hope to have the opportunity to visit the affected communities.
The first test we will have to pass in carbon pricing is showing that it can have an effect in communities where employment is lost as a result of a change in the carbonised nature of the economy. It is one thing to help people to deal with the effects of higher carbon pricing and another to help them to deal with the effect on transport. The Deputy represents communities in which jobs are being lost. They are part of the first test we have to pass in how carbon pricing will work.
I hear what the Minister is saying, but the simple question I have is how do we incentivise the private sector to consider investing in this part of the country where effectively we are looking at Google leaving? Everyone accepts that we face a huge challenge in the region in trying to stimulate employment creation. The public sector investment is welcome and I do not want to knock it, but if we are to create long-term sustainable jobs, we can only do so by growing and supporting existing and new businesses in the region. I have made a suggestion in a constructive manner that we look at how we can get people to focus on and look at the region. How do we do it if we will not do it this way? As we all accept that it needs to happen, how will it happen otherwise?
It will happen through the work we are doing in the appointment of a just transition commissioner whose first priority will be the communities to which the Deputy is referring. It will happen through the local structures being put in place. It will happen through the local authorities and local communities. It will happen as a result of the fact that we have funding that will be used to try to lever private sector investment in local economies. The funding to which we are referring will have a larger effect than relatively minor changes we could make to the tax code for which the Deputy is looking and which I cannot make under state aid rules. To answer the Deputy's question about how we can do it in a different way, it is will happen through the agencies, the just transition commissioner, the LEOs and making use of the money that will be provided from the proceeds raised in having a higher level of carbon pricing.
I will not dwell on the issue, but the Minister's predecessor brought forward schemes in the Georgian areas of cities to try to rehabilitate them. Everyone accepted the merits of the schemes at the time. We are talking about trying to rehabilitate the economy of a region that is about to be wiped out. I accept that the provision would not have a massive impact on the level of investment, but it would be an indication from the Government that it wanted to see private sector investment in the area, particularly because of the unique challenges we are facing.
We had an exchange earlier about the living city initiative and a discussion about the relative lack of a drawdown under it. The living city initiative is a micro and deeply targeted scheme at neighbourhoods in a small number of cities. While I completely understand why the Deputy might see it as being analogous to what he is looking for, there is no comparison with the level of scale. We are talking about a small number of houses, whereas the Deputy is talking about large communities. That is why we can do it, but we cannot do what the Deputy is looking for.
I accept that the living city initiative covers a small area, but the reality is we could introduce such a measure. We have in the past introduced specific geographical schemes for cities and parts thereof, but when Google leaves rural Ireland, we can come up with reasons we cannot introduce such a measure. The point I am making is we need to find some way to stimulate private sector investment in the region. I will leave it at that because we are only going around in circles.
I move amendment No. 30:
In page 30, between lines 15 and 16, to insert the following: “26.The Minister shall, within 90 days of the passage of this Act, publish a report on options for the enhancement of the Employment Investment Incentive relief in the Midlands Peat Region of Roscommon, East Galway, Longford, Offaly, Westmeath and Laois.”.
I with withdraw the amendment with leave to reintroduce it on Report Stage.
I move amendment No. 31:
In page 30, between lines 15 and 16, to insert the following: “Report on revised threshold for High Wealth Individuals
26. The Minister shall, within 3 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the introduction of a new threshold for High Wealth Individuals defined as persons in possession of net assets of the value of €10 million and above.”.
I will also withdraw this amendment.
I move amendment No. 34:
In page 35, line 9, after “activities” to insert the following: “or who would be chargeable to corporation tax in respect of the profits or gains arising from the relevant activities but for section 129”.
Section 26 substitutes the existing transfer pricing legislation to update and modernise the rules in line with the Coffey review recommendations. It was recommended that consideration be given to extending the rules to cover a wider range of transactions between associated persons, including non-trading transactions. Domestic non-trading transactions involving associated persons chargeable to Irish tax in respect of the transaction will remain outside the scope of the transfer pricing rules. This was provided for to address the concerns raised in the Coffey review about the potential impact on domestic intra-group financing.
Amendment No. 34 ensures the exclusion from transfer pricing rules of domestic non-trading transactions will apply, not only where the parties to the transaction are chargeable to tax but also where they would be chargeable to tax but for the fact that dividends received from Irish companies, paid from taxed profits, are exempt from tax. The amendment ensures the exclusion will be available in respect of certain non-trading transactions involving a company the business of which consists wholly or mainly of the holding of shares in an Irish company. A failure to make this arrangement would result in the unintended consequence of bringing this type of wholly domestic arrangement into the scope of the revised transfer pricing rules.
The other amendments are minor changes, including amendments to correct a minor typographical error and a drafting oversight in section 26 of the Bill.
I move amendment No. 40:
In page 48, between lines 3 and 4, to insert the following: “Report on impact of financial transactions tax
28. Within 6 months of the passing of this Act, the Minister shall produce a report on the revenue deriving from a financial transactions tax of 0.1 per cent on shares and securities and 0.01 per cent on derivatives.”.
This amendment proposes the preparation of a report on establishing a financial transactions tax or a so-called Tobin tax of 0.1% on shares and securities and 0.01% on derivatives. Obviously, we are calling for a report because we cannot call for an amendment. The Minister likes to talk sometimes about the importance of a broad tax base and this is one way of broadening the base by way of taxing financial transactions. It is not solely or even primarily about raising revenue but about trying to curb speculative transactions which are of no social good whatsoever. There are proposals for an EU-wide financial transactions tax to which the Irish Government is opposed. Other European countries have already moved in the direction of a financial transactions tax.
This amendment refers to the model of financial transactions tax proposed by the European Commission, initially in 2011 and then revised under the EU’s enhanced co-operation procedure in February 2013. The proposed rate on exchanges of shares was 0.1% and the proposed rate for derivative transactions was 0.01%. Since it was first mooted, Ireland has had concerns about the financial transactions tax proposals which are widely shared by other member states, including some of the countries participating in enhanced co-operation. In line with these concerns, I continue to believe that the tax only makes sense if it applies on as wide an international basis as possible. Otherwise, transactions will gravitate toward those financial centres which are not covered by it.
If Ireland was to participate in an EU-wide financial transactions tax, this would necessitate the abolition and replacement of our current tax, a stamp duty on financial transactions. I am advised by Revenue that the yield from the Irish stamp duty of 1% on transactions in shares, stocks and marketable securities was €420.7 million in 2018 and currently stands at €326.5 million to the end of October 2019. Instruments used in the financial services industry such as derivatives are generally exempt from stamp duty unless they relate to immovable property in Ireland or shares in Irish registered companies. The financial transactions tax proposal is still being discussed by my Eurogroup colleagues and by the ten member states involved in the enhanced co-operation process, of which Ireland is not one.
I am aware that a number of EU member states, like ourselves, currently operate forms of a financial transactions tax. These include France and Italy, where such taxes are applied to shares in companies with market capitalisations in excess of €1 billion and €500 million respectively. If such conditions were to be put in place here, it is likely that our ability to levy such a tax would be severely limited.
It is not possible to accurately estimate from data held by Revenue the yield of a financial transactions tax modelled on the proposed EU one. Our concern is that we would be putting in place a tax on transactions which would likely leave Ireland unless such a measure was introduced at the same time across the EU, of which there is no sign at the moment. It is for these reasons that I am not in a position to accept this amendment.
This is like proposals to increase the effective rate of corporation tax or to close corporate tax loopholes, whereby the answer from the Government is always the same. It says that it is not necessarily against the idea but that everyone would have to do it at the same time. This is just an excuse to lag behind developments and to try to maintain our tax haven status. The Government will always find an excuse. When enhanced co-operation is taking place, for example, the Government is very pointedly not involved even though it is something that is happening on a cross-member state basis. The Government then shifts the goalposts and says that it must happen all across the EU but it is not really interested in that happening either.
This is partly about tackling or moving away from the tax haven model of the Irish economy. Profits from financial and insurance activities in Ireland last year amounted to €23.8 billion. That is a profit of €625,000 for every single employee in the IFSC, which is an extreme outlier in terms of financial profitability and it points to the reality that Ireland is a major tax haven. Ireland plays a particular role in the chain of tax havens around the world. It is not the same as Panama, Bermuda or elsewhere but plays a particular role and part of that accounts for the size of our financial sector, which is absolutely out-sized. This means that we suffer from the finance curse. This amendment is about dealing with that. We estimate that on top of the stamp duty, this measure would raise an additional €209.6 million on an annual basis. Clearly, there are lots of very good things upon which that money could be spent but it is also clear that this Government is not interested in that.
I am always interested in new ways of finding revenue in order to fund better public services. The clearest proof I can offer of the difficulty of making this happen is that a group of other EU countries have been involved in enhanced co-operation on this proposal for over six and a half years and it still has not happened. Included within that enhanced co-operation procedure are countries that are many times bigger than Ireland with very large financial services sectors. The clearest evidence that I can offer to Deputy Paul Murphy of the difficulty in making this happen is that countries that are committed to doing it - and Ireland is not one of them - still have not done so. They have not done so because once they get into the nitty gritty of doing it, they run into the global complexity of the issue that I have described that affects Ireland or that I am seeing through an Irish lens, namely that in order to avoid losing investment, employment and the location of companies, it would need to happen on a global level and there are no signs of that at all.
Ireland is not a tax haven. We have very clear tax policies which are independently implemented by the Revenue Commissioners. We always have issues that we need to address to ensure that tax is being paid fairly and effectively within our country but we are not a tax haven. The proposal that the Deputy has outlined here is not practical in terms of it actually happening for our country and as I said, countries larger than Ireland have decided not to do it.
I move amendment No. 42:
In page 48, to delete lines 27 to 40, and in page 49, to delete lines 1 to 5 and substitute the following: “(2) In this section—(a) subject to paragraph (b), ‘net proceeds’, in relation to the disposal of the property of the property rental business, means the full proceeds from such disposal as reduced by any amount used to repay, in whole or in part, specified debt to the extent that the specified debt being repaid was employed in the acquisition, enhancement or development of the property being disposed of;(3) Where the net proceeds from the disposal of the property are not—
(b) where the reference to the expression ‘net proceeds’ (in relation to such disposal) occurs for the purposes of subsection (3)(ii), that reference shall be deemed to be a reference to an amount that is equal to the net proceeds (in relation to such disposal) as that expression is to be construed by virtue of paragraph (a).(a) invested in the acquisition of a new property for use in the REIT’s or group REIT’s property rental business,(4) Subsections (2) and (3) of section 172D, and subsection (4) of section 153, shall not apply to any distribution of the proceeds of a disposal referred to in subsection (1).”,”.
(b) invested in the development or enhancement of a property held for use in the REIT’s or group REIT’s property rental business, or
(c) distributed to the shareholders of the REIT or the shareholders of the principal company of the group REIT, as the case may be,
before—(i) the expiry of the period referred to in section 705I(2) (in this subsection referred to as the ‘first mentioned period’) or, if earlier than that expiry, the date specified in a notice given under subsection (1) or (4) of section 705O (in this subsection referred to as the ‘specified date’), or
(ii) for the purposes of satisfying the condition specified in paragraph (a) or (b), the expiry of the period of 12 months beginning prior to the date of disposal of the property, then any amount not so invested or distributed shall, for the purposes of applying the condition specified in section 705B(1)(b)(vi) and for the purposes of section 705N(a), be treated as property income of the REIT or group REIT arising in the accounting period in which the first mentioned period expires or the specified date falls.
I am conscious of how late it is now and also that this amendment will generate considerable debate. I am happy to deal with it now or if members prefer, we can commence with it in the morning.
That is fine. Section 28 provides for a number of amendments to the tax regime for Real Estate Investment Trusts, or REITs, to ensure that the correct tax is paid in relation to the disposal of property by a REIT and to encourage long-term, stable investment in rental property. One of these measures provides that where a REIT disposes of a property, it must either reinvest the proceeds in property assets or distribute the proceeds to shareholders within a two year period. I am proposing an amendment to this provision to ensure that it is proportionate and operates as intended.
The amendment has two elements. The first element provides that the proceeds from a disposal of a property can be used to repay any debt associated with the disposed property. The second is to extend the reinvestment period to include the 12 months prior to the disposal, in addition to the 24-month period following the disposal of the property in which the REIT may reinvest the proceeds. Following consultation, it has been advised that it is not uncommon for a REIT to acquire a new property before the disposal of a property, whose disposal is being used to fund or part-fund the new acquisition. I commend the amendment to the committee.
I have a few questions. First, with regard to the amendment, would a company disposing of a property where it is subject to capital gains tax be able to reduce that against the debt that would be held on the property? That is my understanding of what the amendment does.
I ask that we go into private session so I can give the Deputy the accurate answer and not be a proxy for it. If the Deputy has other questions on that, perhaps he would group them because there might be some that would be appropriate for me to answer and some for the officials to answer.
I will make my point on the overall issue. My concern about this section, which deals with REITs, is the tax that will be paid now on the disposal of property. It will not be capital gains tax at 33% but, presumably, class 4 corporation tax at 20%, which is not what other companies would pay if they were disposing of properties. This refers back to my earlier comments. This is property being disposed of by a type of company or structure where any other company would have to pay capital gains tax on it. The amendment I tabled, which was ruled out of order, proposes that capital gains tax should apply regardless of whether it is being reinvested into the company. That is what applies to any company involved in property transactions. I feel strongly about this but I will not say anymore about it because I rehearsed it earlier.
With regard to section 28, I welcome the closure of this loophole, which requires a REIT to be in operation for 15 years. I made my point on Second Stage and I will repeat it now. Let us consider the reality if the REIT is in operation for 15 years and take the example of the REIT that is currently involved in a sale, Green REIT to Henderson Park, of €1.3 billion of assets. Let us say it was operational for the past 15 years. That would mean those assets could be valued at the date of transaction and, therefore, there would be no capital gains to be paid on the transaction. That is what is happening at present. The Minister is introducing this measure which, I guess, would have an impact in respect of the sale to Henderson Park, but it should apply even if the REIT is operational for 15 years. If a REIT is getting out of the market, selling its assets and it is not going into another REIT, why would we allow capital gains tax not to be applied in respect of the significant uplift that happened? In the case of Green REIT, the appreciation of the assets within that fund structure is €300 million and the capital gains tax that must be paid as a result will be €100 million. When this measure was identified on budget day, there was no attributable income. Can the Minister confirm that the measure will bring in anything up to €100 million or can he give us an indication of where it would apply?
The reason I ask is that we need to know as legislators, as this is highly technical, if there is some other loophole here that allows for this sale to go through without capturing it. I presume that this is about capturing a REIT that is only in operation for four or five years, is now disposing of all its assets and is able to use that structure to secure a huge win for its investors of up to €100 million.
I believe this section is justified and necessary. It is proportionate and is related to the fact that my predecessor and I always stated that the reliefs made available to the REIT sector were made available on the expectation of its long-term operation. The changes I have made here are driven by that broad policy consideration and my intention to follow that through to the end. That is the reason I made these changes. We touched on the issue of capital gains tax, the level and whether it should be paid here. I have given my view on that but probably will do so again. However, the Deputy asked two quite technical questions and, if the Acting Chairman agrees, I ask that we go into private session and have the questions answered. Then I am happy to continue with a debate on the policy choices. Given the sensitivity of this matter, I wish to ensure the committee is given accurate answers on it.
I move amendment No. 43:
In page 50, between lines 10 and 11, to insert the following:“(b) by inserting the following section after section 739K:
739KA.(1)In this section and section 739LC—‘connected’ has the same meaning as in section 10, subject to the modification that references in section 10 to ‘control’ shall be read as if they were references to control within the meaning of subsection (4)(2) Where the entity referred to in paragraph (b) of the definition of ‘entity’ is an umbrella scheme, regard shall be had to each sub-fund of that umbrella scheme and the unit holders of that sub-fund, as if that sub-fund was an entity in its own right.
of this section;
‘deposit’ means a sum of money paid to an enterprise on terms under which it, or any part of it, may be repaid with or without interest and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person to whom it is made, notwithstanding that the amount to be repaid may be to any extent linked to or determined by changes in a stock exchange index or any other financial index;
‘enterprise’ means an entity or an individual;
(a) a person (other than an individual),
(b) an investment undertaking, subject to subsection (2),
(c) a pension scheme,
(d) an offshore fund (within the meaning of section 743(1)), or
(e) any other agreement, undertaking, scheme or arrangement, whether established or created under the law of the State or of a territory other than the State,
that would, for the purposes of the Tax Acts, be regarded as—
(i) carrying on any of the activities referred to in paragraph (b), (c) or (d) of subsection (4), or
(ii) advancing amounts, making funds available or receiving interest as referred to in subsections (3) and (4) of section 739LC;
‘member’, in relation to a pension scheme, means—
(a) an employer or employee, in respect of a scheme referred to in section 774,
(b) an individual referred to in section 784(1)(a), 784A(1)(b), 784C(2) or 785(1), or
(c) a contributor, within the meaning of section 787A, in respect of a PRSA;
‘significant influence in the management of’, in relation to an entity, means the ability to participate in the financial and operating decisions of that entity.
(3) For the purposes of this section and section 739LC, an enterprise shall be treated as an associate of another enterprise where—(a) one of the 2 enterprises has control of the other enterprise, or both enterprises are under the control of the same enterprise or enterprises,(4) For the purposes of this section, an enterprise shall be taken to have control of an entity if one or more than one of the following conditions are satisfied:
(b) one enterprise is connected with the other enterprise,
(c) those enterprises are associated within the meaning of section 739D(1)(a), where those enterprises are investment undertakings or similar entities established under the laws of a territory other than the State,
(d) one enterprise is a pension scheme and the other enterprise is a member of that scheme, or
(e) one enterprise is a scheme, similar to a pension scheme, that is established under the laws of a territory other than the State and the other enterprise is a member of that scheme.(a) where the enterprise is an entity, and—(5) Where 2 or more connected enterprises together satisfy the condition set out in subsection (4)(b), they shall each be taken to have control of the entity.(i) both entities are included in the same consolidated financial statements prepared under—(b) where that enterprise exercises, or is able to exercise or is entitled to acquire, control, whether direct or indirect, over the entity’s affairs and, in particular, but without prejudice to the generality of(I) international accounting standards, or(ii) both entities—
(II) Irish generally accepted accounting practice,
or(I) are not included in the same consolidated financial statements, orbut would, if consolidated financial statements were prepared under the accounting practice referred to in paragraph (a)(i)(I), be included in the same consolidated financial statements;
(II) are included in consolidated financial statements prepared under an accounting practice referred to in paragraph (a)(i)(I),
the foregoing—(i) if such enterprise possesses or is entitled to acquire (other than in the circumstances described in section 739LC(4))—(c) where the enterprise has significant influence in the management of the entity;(I) not less than 25 per cent of the—(ii) by virtue of any powers conferred by the constitution, articles of association or other document regulating that or any other entity;(A) issued share capital of a company, or(II) not less than 25 per cent of the voting power in the entity, or
(B) units of an investment undertaking,
(III) such rights as would if the whole of the profits of the entity were distributed, entitle the enterprise, directly or indirectly, to receive 25 per cent or more of the profits so distributed,
(d) where the enterprise holds one or both of the following securities in the entity:(i) securities convertible directly or indirectly into shares in a company, or units in the investment undertaking, or securities carrying any right to receive units or securities of the entity;
(ii) securities under which the consideration given by the entity for the use of the principal secured—(I) is to any extent dependent on the results of the entity’s business or any part of the entity’s business, where the entity is not an investment undertaking, or
(II) represents more than a reasonable commercial return for the use of that principal.
(6) For the purposes of subsection (4)(b), an enterprise shall be treated as entitled to acquire anything which such enterprise is entitled to acquire at a future date or will at a future date be entitled to acquire.
(7) For the purposes of subsections (4)(b) and (5), there shall be attributed to an enterprise any rights or powers of a nominee for such enterprise,that is, any rights or powers which another enterprise possesses on
such enterprise’s behalf or may be required to exercise on such enterprise’s direction or behalf.
(8) For the purposes of subsections (4)(b) and (5), there may also be attributed to any enterprise (in this subsection referred to as the ‘firstmentioned enterprise’) all the rights and powers of—(a) any enterprise of which the first-mentioned enterprise has, or the first-mentioned enterprise and associates of the first-mentioned enterprise have, control,
(b) any 2 or more enterprises of which the first-mentioned enterprise has, or the first-mentioned enterprise and associates of the firstmentioned enterprise have, control,
(c) any associate of the first-mentioned enterprise, or
(d) any 2 or more associates of the first-mentioned enterprise,
including the rights and powers attributed to an enterprise or associate under subsection (7), but excluding those attributed to an associate
under this subsection.”,”.
I advise Deputies that I will be bringing forward a technical amendment on Report Stage to ensure that the original holder of excessive rights provision is fully reinstated to the form it held prior to this year's Finance Act. Section 29 provides for a number of amendments to the tax regime for Irish real estate funds or IREFs. Amendments Nos. 43 to 49, inclusive, make a number of changes to section 29 as published. As the amendments are quite lengthy, I will provide committee members with a longer speaking note to give as much detail as possible on the material contained in the amendments. I will take members through the speaking note, which I will circulate to members along with a number of other speaking notes tomorrow. What we are going through here is very technical. If any Deputy wants to meet my officials in advance of Report Stage regarding any questions they may have about it or issues they want to be clarified, my officials are available to them.
As the Deputies are aware, following a review of the first IREF financial statements filed earlier this year, Revenue have identified aggressive tax practices by some IREFs. As a result of this, I have moved to introduce additional anti-avoidance rules and further compliance requirements into the IREF taxation regime as part of Finance Bill 2019. A number of these measures were introduced via financial resolution on budget night.
Section 29, as published, introduces new restrictions on the interest deductions that can be taken by an IREF in arriving at the surplus available for distribution. Tax will now be payable at fund level on the excess interest. As a result of stakeholder engagement following publication of the Bill, particularly with the Department of Housing, Planning and Local Government, I am proposing a Committee Stage amendment to allow relief from the resulting tax charge for interest paid on genuine third party debt.This amendment will ensure that the provision operates as intended to address excess interest charges on related party debt without acting as a disincentive to property development using genuine, arm's length, third party funding. To ensure that this exclusion is only available for genuine third party debt, a robust and comprehensive definition of associated enterprise is being introduced in the new section 739KA contained in amendment No. 43. The robust restrictions to the relief for third party debt are further supported by an anti-avoidance measure, which provides that the relief will not be available in respect of third party debt that is used to acquire property from a connected party. There is one exception to this provision, namely, in certain circumstances where an IREF acquires property on which significant development has been carried out for the purposes of property rental.
Amendment No. 44 introduces a new provision to tighten the interest restriction rules by amending the definition of specified debt to ensure that it includes debt advanced to a partnership of which the IREF is a partner as well as debt advanced directly to the IREF itself.
Amendment No. 45 relates to the profit financing cost ratio introduced by financial resolution on budget night. It corrects a technical anomaly in the formula that occurs in situations where an IREF has a loss. It also ensures that for the purposes of the profit financing ratio, only the annual income profits are taken into account and not any realised or unrealised capital gains or losses. As the profit financing ratio formed part of the financial resolution, the appropriate method to correct these issues is to introduce a new section 739LAA, as contained in this amendment. In conjunction with this amendment to the profit financing ratio, amendment No. 45 provides for third party interest on the acquisition of a property to be included as an allowable part of the cost for the debt-to-cost limit ratio. This is in line with the normal treatment of interest as an allowable cost for capital gains tax purposes. These amendments will not compromise the financial resolution and will take effect from 1 January 2020. Amendment No. 45 also includes two provisions required to prevent any unintended consequences to the charge to tax now being at fund level in certain circumstances. The first ensures that the rate of tax levied on the IREF as a result of the new anti-avoidance measures is 20% regardless of the underlying legal form of the IREF. The second ensures that transactions with an IREF do not come within scope of the transfer pricing exemption that will apply to certain domestic transactions between entities within the scope of Irish tax.
Amendment No. 48 relates to the measure in section 29, as initiated, which proposes to transfer an existing holder of excessive rights charge from the shareholder to the fund. However, it has been determined that the provision as currently drafted would unintentionally result in an additional layer of tax and would remove the current ability for some investors to claim double tax relief in their home tax jurisdiction for Irish tax paid on their IREF profits. A broad range of stakeholders have advised that this measure would negatively impact on current property development projects, including residential housing projects. Officials have been unable to identify a method to resolve these issues in the legislation as currently drafted and, therefore, I propose to withdraw this provision from the Bill. As a result, the holder of excessive rights charge will remain at the level of the shareholder, rather than the fund.
Amendments Nos. 46, 47 and 49 provide for a number of corrective amendments that are purely technical in nature.
Notwithstanding my issues regarding how IREFs are taxed and so on, some of the amendments go in a direction of dealing with aggressive tax planning within the structure, and I welcome that. The Minister was not mincing his words when he stated it is deeply technical. We will need his expanded speaking notes and we will look at the amendments further on Report Stage. It will be too late at that Stage and the amendments need to be dealt with on Committee Stage, but some of this is extremely technical. I welcome that the areas that have been spotted by Revenue are being closed down in terms of aggressive tax planning. I presume a substantial portion of the €80 million will come from these amendments.
I do not have such an estimate because of the need to make a judgment on the degree to which this behaviour was widespread. I am indicating that these measures will bring in a recurring contribution of €80 million.
The Revenue has on the Statute Book very extensive general anti-avoidance provisions whereby it can cut to the substance of a transaction and if a transaction is designed to avoid tax, the Revenue can essentially set it aside. Is it the case that until now Revenue powers were insufficient to deal with excessive interest, for example, which was reducing profits within vehicles? Did the Revenue have the power to set that aside?
I move amendment No. 44:
In page 52, to delete line 17 and substitute the following: “off.
Exclusion for third-party debt
739LC.(1) Where—(a) an amount of income is treated as arising to an IREF under section 739LA or 739LAA, and(2) (a) Subject to subsection (4), for the purposes of this section, ‘third-party debt’ means—
(b) some or all of that amount relates to a third-party debt,
the amount of income on which the IREF is charged to income tax shall be reduced by the amount of income that would have been charged to tax had the specified debt consisted solely of third-party debt.(3) For the purposes of subsection (2)(a)(iii), the arrangements are any of the following:(i) a loan advanced to the IREF by an enterprise other than an associate of that IREF,(b) References in this section to an amount being advanced to an IREF, or being payable by an IREF, shall be read as including an amount advanced to, or payable by, a partnership in which the IREF is a partner.
(ii) where the full amount advanced is employed, subject to paragraph (c), in the purchase, development, improvement or repair of a premises, and
(iii) the loan is not subject to any arrangements of a type referred to in subsection (3),
and includes a loan which satisfies the conditions of subparagraphs (i) and (iii) where the amount advanced is used to repay a loan which satisfied the condition of subparagraph (ii).
(c) For the purposes of paragraph (a)(ii)—(i) monies borrowed at or about the time of the purchase of the premises shall be treated as having been employed in the purchase of those premises, and
(ii) amounts employed in purchasing a property from an associate of an IREF shall only be treated as third-party debt if immediately prior to the purchase that associate had carried out significant development work on the property, such that the development exceeds 30 per cent of the market value of the property at the date of the commencement of the development, and the property is being acquired by the IREF for the purposes of property rental.(a) arrangements pursuant to which—(4) Notwithstanding section 739KA, a loan which is a third-party debt shall not cease to be so treated where the lender becomes an associate of the IREF solely on account of the enforcement of any security granted as a bona fide condition of, or in connection with, the loan.”,”.(i) interest is payable by an IREF to another enterprise such that this section does not apply by virtue only of the fact that the IREF and the enterprise concerned are not associated, and(b) arrangements pursuant to which—
(ii) interest is payable by some other enterprise not associated with the IREF to an enterprise associated with the IREF;(i) interest is payable by an IREF to another enterprise (in this paragraph referred to as the ‘first-mentioned enterprise’) where the IREF and the first-mentioned enterprise concerned are not associated, and(c) arrangements entered into in relation to an IREF the effect of which is that any amount has been advanced, or funds have been made available, indirectly from an associate of an IREF to the IREF, or interest is payable by an IREF indirectly to an associate of that IREF, in circumstances other than those referred to in paragraph (a) or (b);
(ii) the first-mentioned enterprise—(I) has been advanced an amount by another enterprise that is an associate of the IREF, or
(II) has received a deposit from another enterprise that is an associate of the IREF, equal to some or all of the principal amount of the loan in respect of which the interest referred to in subparagraph (i) is payable;
(d) arrangements pursuant to which—(i) associates of an IREF (in this paragraph referred to as the ‘first-mentioned IREF’) advance amounts, or make funds available, directly or indirectly to an IREF with whom they are not associated (in this paragraph referred to as the ‘second-mentioned IREF’), and
(ii) associates of the second-mentioned IREF advance amounts, or make funds available, directly or indirectly to the first-mentioned IREF,
and those IREFs, or those associates, are acting in concert or under arrangements made by any enterprise.
I move amendment No. 45:
In page 52, between lines 17 and 18, to insert the following: “(e) by inserting the following section after section 739LA (inserted byparagraph (d)):“Profit: financing cost ratio from 1 January 2020
739LAA.(1) In this section—‘adjusted property financing costs’ means the property financing costs less any amount of income referred to in subsection (2)(b);(2) (a) This subsection applies where the aggregate of the specified debt exceeds an amount equal to 50 per cent of the relevant cost of the IREF assets (and that excess is referred to in this subsection as the ‘excess specified debt’).
‘annual IREF profits’ means the profits, gains or losses of an IREF business as shown in the income statement of the IREF excluding—(a) any realised profits, gains or losses in relation to the disposal of an asset, andwhere the disposal of such asset would be a disposal of a chargeable asset for the purposes of capital gains tax or corporation tax on chargeable gains and would otherwise form part of relevant profits of the IREF which are not chargeable to tax under section 739C;
(b) any unrealised profits, gains or losses in relation to an asset,
‘property financing costs’ means costs, being costs of debt finance or finance leases, which are taken into account in arriving at the profits of an IREF, including amounts in respect of—(a) interest, discounts, premiums, or net swap or hedging costs, and‘property financing costs ratio’ means the ratio of the sum of the annual IREF profits and the adjusted property financing costs of an IREF to the adjusted property financing costs of the IREF;
(b) fees or other expenses associated with raising debt finance or arranging finance leases;
‘relevant cost’ means the amount which would be allowable as a deduction for the purposes of the Capital Gains Tax Acts under section 552 subject to the modification that references in subsection (3) of that section to ‘borrowed money’ shall be read as if they were references only to borrowed money that is third-party debt;
‘specified debt’ means—(a) any debt incurred by an IREF in respect of monies borrowed by, or advanced to, the IREF, or
(b) a portion of any debt incurred by a partnership in which the IREF is a partner, in respect of monies borrowed by, or advanced to, the partnership, calculated as the higher of—(i) the portion of the capital of the partnership held by the IREF, or
(ii) the portion of the profits of the partnership to which the IREF is entitled.(b) Where this subsection applies, the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income determined by the formula—(3) (a) This subsection applies where—where—A x BC
A is the property financing costs,
B is the excess specified debt, and
C is the total specified debt.(4) The amount of income referred to in subsections (2) and (3) shall be charged to income tax under Case IV of Schedule D and shall be treated as income—(i) the property financing costs ratio of the IREF is less than 1.25:1 for an accounting period and the sum of the annual IREF profits and the adjusted property financing costs of an IREF is greater than zero, or(b) Where this subsection applies—
(ii) the sum of the annual IREF profits and the adjusted property financing costs of an IREF is zero or lower(i) by virtue of paragraph (a)(i), the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income equal to the amount by which the adjusted property financing costs would have to be reduced for the property financing costs ratio to equal 1.25:1 for that accounting period, and
(ii) by virtue of paragraph (a)(ii), the IREF shall be treated for the purposes of the Income Tax Acts as receiving an amount of income equal to the adjusted property financing costs.(a) arising in the year of assessment in which the accounting period in which the amount was taken into account ends, and(5) In respect of the charge to income tax imposed under this section and section 739LB—
(b) against which no loss, deficit, expense or allowance may be set off.(a) section 76(6) shall not apply to an IREF which is a company, and(6) (a) Section 739LA shall not apply to an accounting period to which this section applies.
(b) the amount so charged shall, for the purposes of Part 35A, not be profits or gains arising from relevant activities.(b) This section shall apply to accounting periods commencing on or after 1 January 2020 and where an accounting period commences before 1 January 2020 and ends after that date, it shall be divided into two parts, one beginning on the date on which the accounting period begins and ending on 31 December 2019 and the other beginning on 1 January 2020 and ending on the date on which the accounting period ends, and both parts shall be treated as if they were separate accounting periods of the IREF.”,”.
I move amendment No. 50:
In page 60, line 28, to delete “subsection (1)” and substitute “subsection (2)”.
I am bringing forward several amendments to section 30 which introduces new ATAD-compliant anti-hybrid rules to Irish legislation. The majority of the amendments which I am proposing to the section correct drafting, cross-reference and typographical errors in the Bill, as initiated. The remaining amendments address two minor issues that were identified following publication of the Bill and which need to be amended in order for the legislation to operate as intended.
Amendment No. 61 clarifies the definition of "financing return" in order to ensure the legislation provides a clear definition and is consistent with the related definition of a financial instrument. Amendments Nos. 53 to 56, inclusive, relate to the application of anti-hybrid rules as they interact with worldwide systems of taxation.
The purpose of the new section 835AB being introduced in section 30 of the Bill, as initiated, is to ensure that the application of anti-hybrid rules does not give rise to a deemed hybrid mismatch where no mismatch occurs. The amendment corrects small errors in language that occurred during the drafting process and ensures that the provision is effective in respect of other worldwide tax systems internationally in addition to the Irish worldwide tax code.
I move amendment No. 54:
In page 61, to delete lines 15 to 17 and substitute the following: “(a) the head office of the entity and a permanent establishment of that entity,
(b) two or more permanent establishments of the entity,
(c) where the entity is a participator in a hybrid entity, the entity and the hybrid entity, or
(d) where the entity is a participator in two or more hybrid entities, two or more such hybrid entities,”.
I move amendment No. 56:
In page 61, to delete lines 29 to 32 and substitute the following:“but for the fact that the amount against which the payment is deductible in the payer territory is a disregarded payment in the first-mentioned territory,the disregarded payment shall be treated as included in the first-mentioned territory.
(3) This section shall not apply where—(a) the disregarded payments are between—(i) where the entity referred to in subsection (1) is a participator in a hybrid entity, the entity and the hybrid entity, orand
(ii) where the entity referred to in subsection (1) is a participator in two or more hybrid entities, two or more such hybrid entities,
(b) there is, in substance, a hybrid mismatch (either within the meaning of Directive (EU) 2016/1164 or within the meaning of that term when construed in a manner consistent with its use in the reports referred to in section 835Z(2)).”.
I move amendment No. 61:
In page 65, to delete lines 13 to 18 and substitute the following: “(a) dividends and manufactured payments,
(b) interest, including any discounts or amounts which would be treated as interest under Part 8A, notwithstanding that no election is made under section 267U,
(c) the amount of payments that are equivalent to interest under an arrangement described at paragraph (d) of the definition of ‘financial instrument’, and
(d) the underlying return referred to in the definition of ‘hybrid transfer’;”.
I move amendment No. 63:
In page 66, to delete lines 33 to 37 and substitute the following: “(I) in a case in which the non-inclusion arises because of any provision of the Tax Acts or the Capital Gains Tax Acts, in calculating the amount on which the payee is charged to tax, that provision shall be disapplied, insofar as it provides for the non-inclusion, and”.
I move amendment No. 66:
In page 70, line 9, after “tax” to insert the following: “for so much of the payment as corresponds to the mismatch outcome which has not been neutralised in another territory”.