Michael Noonan (Limerick City, Fine Gael)

I move: "That the Bill be now read a Second Time."

The purpose of the Finance (No. 2) Bill is to introduce the necessary changes to taxation legislation which give effect to measures I announced on 10 May as part of the jobs initiative.

There is now a broad consensus that the economy will return to growth this year. The Department of Finance published revised economic forecasts the week before last which anticipate that the economy will expand by 0.8% this year and 2.5% in 2012. Other institutions such as the IMF, the European Commission, the Central Bank and the ESRI also anticipate an increase in economic activity in 2011, followed by acceleration in the growth rate next year. We are beginning to move in the right direction and the jobs initiative will add to that momentum.

The recovery is being led by developments in the external sector. Exports grew by 9.5% last year, the strongest rate of growth in a decade, and appear to have continued this impressive trend at the start of 2011. This would be typical of a small open economy. The pharmaceuticals, software, financial and business services and food sectors are all performing well. Exporters are looking to new export opportunities in north and south America and Asia; exports to Brazil, Russia, India and China, the BRIC countries, increased by 12% last year. However, it might be appropriate to note at this point that the success of the royal visit last week may also have economic benefits for exporters trading with our nearest neighbour. The impressive export performance and the increase in FDI inflows have been underpinned by significant improvements in our competitiveness, reversing the sharp losses experienced earlier in the decade.

The Department's forecasts anticipate average growth of 3% per annum in the period 2013 to 2015. Given the need for additional adjustment in the internal economy, notably essential fiscal consolidation and an unwinding of private sector imbalances, recovery in domestic demand will take longer than normal to occur. Nevertheless, the recovery is expected to spread from the external sector to investment and, finally, to consumer spending, while growth is expected to be more broad-based by the end of the forecast horizon. This House does not need me to remind it that the Irish economy has experienced an extremely sharp downturn in recent years. Gross domestic product has contracted in each of the past three years and is now around 15% lower than it was at its peak in mid-2007. This, of course, reflects a substantial decline in construction activity and falling consumer spending. However, despite the downturn, the fundamental strengths of the Irish economy remain and will support growth in the medium term. These strengths include our young, well-educated workforce, favourable demographics and our strong pro-enterprise environment. Building on and developing these strengths is one of the principal drivers of the jobs initiative.

Improving the environment to create a more fertile seed bed for the creation of more jobs is a challenge that this Government is meeting. Improving labour cost competitiveness is a key instrument in creating that improved environment. This is why we are halving the rate of employers' PRSI until end-2013 on jobs that pay up to €356 per week. Reducing the costs to employers of taking on new employees is vital if we are to support job creation. This measure will complement the targeted VAT relief in the labour-intensive tourism sector and help to create more jobs in that sector of our economy. My colleague, the Minister for Social Protection, will legislate for the reduction in employers' PRSI in the forthcoming social welfare Bill which she will publish in early June. The social welfare Bill will also legislate for the abolition of the charge to employers' PRSI on share-based remuneration with effect from 1 January 2011. The imposition of this charge on employers needlessly increases the costs of doing business in Ireland and has the potential to negatively affect current employment levels and future investment decisions. Businesses operate under strict budgetary control in the current economic climate and increasing their costs is unwise.

I remind the House that this not a typical finance Bill. On this occasion, the Finance (No. 2) Bill has been drafted specifically and exclusively to give effect to those taxation-related measures which I announced in the jobs initiative. Accordingly, the Bill is short and focused and covers four areas - the research and development tax credit; the suspension of the air travel tax; the introduction of a second lower rate of value-added tax; and the introduction of a pension levy.

I will now discuss each of these four measures in more detail. Section 1 of the Bill relates to the research and development tax credit. While Deputies will be aware that the corporation tax regime is a vital element of our industrial policy, other measures also have an important part to play. Ireland has a very attractive research and development tax credit scheme which allows, as a general measure, a 25% of incremental expenditure by a company on qualifying research and development to be set off against its corporation tax liabilities or, where there are no such liabilities, for the credit to be paid to the company. Since 2004, the scheme has influenced the decisions of many multinational firms to locate internationally mobile research and development projects in Ireland.

There are various methods by which companies can account for the research and development tax credit, either as a below the line reduction in corporation tax liability or as an above the line write-off against operating costs. I announced as part of the jobs initiative that I intended to amend the research and development tax credit legislation. Accordingly, this section of the Bill amends the research and development tax credit provisions primarily for the purpose of enhancing the flexibility for accounting purposes for the research and development tax credit on an above the line basis. There have been calls by some to do more in this space and, indeed, the programme for Government contains proposals for further improvements to the research and development tax credit scheme, subject to the outcome of a cost benefit analysis.

Section 2 relates to the air travel tax and amends section 55 of the Finance (No. 2) Act 2008, to empower the Minister for Finance to appoint, by order, a day on or after which passenger departures would not be subject to the tax. As part of the effort to boost tourism, I am thereby providing for the air travel tax rate to be reduced to zero or suspended. To be clear, the commencement of this measure is subject to an agreement being reached with the airlines to bring in additional passenger numbers. My colleague, the Minister for Transport, Tourism and Sport, is holding discussions in that regard. If these discussions are satisfactorily concluded, I will introduce this provision by order on a specific date, to be agreed. Furthermore, a review of the measure will be conducted before end 2012. If it is considered unsuccessful the air travel tax will be reapplied. Consequently, the relevant legislation measures will remain in place to allow for them to be recommenced if so required. The cost of this measure, based on an implementation date of 1 July 2011, is €15 million in 2011, €90 million in 2012 and €105 million thereafter. The suspension of the air travel tax is but one of a number of approaches being taken as part of the jobs initiative to revitalise the tourism industry.

Section 3 amends the Value-Added Tax Consolidation Act 2010, to provide for a second reduced VAT rate of 9%, in respect of certain goods and services, for the period 1 July 2011 to 31 December 2013. Thereafter the rate will revert to the 13.5% rate. It is estimated that this measure will cost €120 million this year and €350 million in a full year. As I announced in the jobs initiative statement, this amendment provides that the 9% rate will mainly apply to restaurant and catering services; hotel and holiday accommodation; admissions to cinemas, theatres, certain musical performances, museums and art gallery exhibitions; fairgrounds or amusement park services; use of sporting facilities; hairdressing services; and printed matter such as brochures, maps, programmes, leaflets, catalogues, magazines and newspapers.

The purpose of this targeted VAT relief is to boost tourism and to stimulate employment in the sector and I am confident that it will give our tourism industry a much needed shot in the arm. However, to ensure that the sector is delivering, the effects of the changes will be assessed and the measure reviewed before the end of 2012 in the context of preparing budget 2013. To digress slightly, I would note that these two measures are specifically targeted at the tourism sector.

Much economic activity within the tourism industry is highly intensive in its use of labour. This is particularly true of hotels and restaurants, recreation and entertainment. However, tourism continued to decline last year with the total number of trips by visitors to Ireland down by 13% on the 2009 level. This brought to 25% the cumulative decline in inbound tourism numbers between 2007 and 2010. Over the same period, earnings from tourism and travel fell by about 30%. The United Kingdom is our most important overseas market with close to half of overseas visitors coming from there. It is also the market that has seen the greatest contraction since the recession began. Between 2007 and 2010, trips to Ireland from Britain fell by 32%. If we can recover this lost ground then tourism can make a very substantial contribution to our economic recovery and to the creation of employment in all parts of the country. Again, I would like to think that the success of last week's visit by the Queen may help us in this aim. Much investment has already taken place in the tourism sector and we have a stock of accommodation, a large proportion of which is of a very high quality by international standards. We have entertainment and recreational facilities that have been significantly enhanced by public investment in recent years and a much-improved transport infrastructure. Overall, our tourism products are very strong and present us with a great opportunity for development and expansion.

The various tax reduction and additional expenditure measures announced as part of the jobs initiative are, of course, required to be budget-neutral. This means that money to pay for them must be raised from other sources. Accordingly, I announced on 10 May a temporary levy on funded pension schemes and personal pension plans. This is provided for in section 4. The levy will apply at a rate of 0.6% to the capital value of assets under management in pension schemes approved by the Revenue Commissioners under Irish tax legislation. The schemes affected are retirement benefit schemes, that is, occupational pension schemes, retirement annuity contracts and personal retirement savings accounts other than those known as vested PRSAs. It will apply for a period of four years, commencing this year, and is intended to raise approximately €470 million in each of those years. The levy will not apply to pension funds established here that provide services and benefits solely to employers and members exercising their activities and employment outside the State. In other words, the levy will not apply to a scheme that is intended to provide retirement benefits outside the State. In addition, it will not apply if the trustees of a scheme have passed a resolution to wind up the scheme and if the business in respect of which the scheme was established is insolvent. Provision is being made to give pension scheme trustees or administrators the option of adjusting the benefits payable under a pension scheme on foot of payment of the duty. The chargeable persons for the levy are the trustees of pension schemes and the insurers and administrators who manage the assets of pension schemes.

Section 4 makes consequential changes to certain provisions of the Taxes Consolidation Act 1997 relating to the approval conditions that apply to pension scheme providers located outside the State that seek to provide retirement benefits in the State. Under the existing legislation, unless such providers have a fiscal representative in the State, they are required to enter into a contract with the Revenue Commissioners to the effect that all duties and obligations imposed by the pensions tax legislation will be discharged. These duties and obligations are being extended to include the levy. There has been some speculation that the Government will raid investment funds or deposit accounts. I assure the House that the Government has no plans in this regard.

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