Shane McEntee (Meath East, Fine Gael)

I thank everyone for their contributions. I recognise the matters raised by Deputy Mattie McGrath with regard to Bank of Ireland. I attended one such session in Ballybay last week which was very effective. We need such initiatives where the banks come to meet the people rather than the other way around.

As the Minister for Finance stated when he announced the jobs initiative in the House on 10 May last, the country does not have the resources available at present to fund large-scale policy initiatives to help to generate economic activity. Any costs associated with the measures the Government is implementing as part of this initiative must be paid for through the introduction of off-setting measures to ensure the measures are budget-neutral during the period to 2014. This means that the stimulatory effect on the economy of this package must be modest but it represents the first step by the Government towards improving the competitiveness of important sectors of the economy and enhancing the functioning of the labour market. Further measures will follow with a view to developing the Government's vision of rebuilding a prosperous and productive economy by the end of its term in office.

As the Minister for Finance stated in the Chamber last Tuesday, the Finance (No. 2) Bill has been drafted specifically to give effect to those taxation-related measures he announced in the jobs initiative. These measures are 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. Many Members have spoken eloquently on these and other related measures and I now will turn to the points raised during the course of the debate. Although time will not permit me to address them all, I will try to cover as many of the relevant issues as possible.

Deputy Michael McGrath asked whether the pension fund levy would end as promised in 2014. The legislation governing the pension fund levy provides that it applies only for the years 2011 to 2014. The Government intends to use the pension fund levy to pay for the jobs initiative and it is not proposed to extend the levy beyond this period. Previous levies have been introduced for limited time periods, such as the previous pension fund levy, which applied for the year 1988 only and the bank levy that was in place for three years at the beginning of the last decade. The same Deputy asked about IMF concerns regarding the pension levy. The Government renegotiated the memorandum of understanding with the EU, ECB and the IMF to allow for the jobs initiative, including the pension fund levy.

Deputies Michael McGrath and Sean Fleming suggested that more funds will be raised through the pension levy than will be spent on the jobs initiative. Given our commitments under the joint EU-IMF programme of financial support and current difficulties in the public finances, the jobs initiative is being funded on a cost-neutral basis over the four year period 2011 to 2014 and a careful examination of the figures will show this to be the case. There should be a small net positive to the Exchequer this year as the yield from the pension levy is forecast to be greater than the estimated combined loss of revenue from the VAT, PRSI and air travel tax measures and the small additional level of spending. It is important to view the initiative in the round over the four-year period, remembering that the goal is not direct economic stimulus but rather a targeting of existing resources towards more employment-rich areas of activity.

Deputy Michael McGrath also suggested that the location of pension schemes in Ireland by multinationals might be re-evaluated as a result of the pension levy and Deputy O'Dea stated that were a pension fund to be moved offshore, it would no longer be liable to the levy. The levy will not apply to the assets of occupational pension funds in respect of the provision of retirement benefits to active, deferred or former retired members whose employment in respect of the scheme is and always was exercised outside the State. In other words, the levy will not apply to the extent that a scheme is intended to provide retirement benefits outside the State. A similar provision was included in the previous pension fund levy some years ago so that there should be no substantive deterrent to cross-Border pension funds remaining or being established in Ireland.

The levy will apply to the assets under management in pension funds and pension plans approved under Irish tax legislation by the Revenue Commissioners that are providing retirement benefits to relevant members or beneficiaries in this State, irrespective of whether the administrator of the scheme is based in the State or in another European Union member state. Such overseas schemes providing retirement benefits to relevant members or beneficiaries in this State require approval by the Revenue Commissioners and as part of that approval process, they will be subject to the requirements of the levy.

Deputy Sean Fleming sought to suggest that the exclusion of assets attributable to people working wholly outside the State might be a sop to so-called tax exiles. On the one hand, Fianna Fáil wrongly complains that the levy will have an impact on pension schemes in Ireland that provide services outside the State while on the other, its members complain that a measure that allows for the exemption of such pension funds will encourage avoidance by tax exiles. Deputy Michael McGrath asked whether the Pensions Board was consulted about the introduction of the levy and Deputy Dooley asked whether other State bodies were consulted. Department officials have been in contact with a wide number of interested parties in the public and private sectors, including the Pensions Board, about the practical, logistical and other issues surrounding the introduction of the levy.

Deputies Michael McGrath, Sean Fleming and Boyd Barrett asked about the non-application of the levy to approved retirement funds, ARFs. This issue also was raised by Deputy Pearse Doherty, who referred to ARFs being used to invest in pensions. Some confusion in respect of ARFs and pension funds needs to be cleared up. ARFs do not come within the scope of the pension levy scheme in the same way that an annuity purchased in the name of an individual on retirement also is outside its scope. This is because neither such annuities nor ARFs are pension funds. An annuity essentially is a pension in payment, that is, a stream of income purchased for an individual from a life assurance company for a capital sum at the point of the individual's retirement. ARFs are investment options into which the proceeds of certain pension arrangements can be invested, also on retirement. ARFs are designed to provide a stream of income to their owners on retirement in the same way as annuities. In fact, they were introduced as an alternative to annuities but with more flexibility and control for the beneficiaries over the funds involved.

The stream of income provided by way of annuity is subject to tax at the annuity holder's marginal tax rate and drawdowns from ARFs are similarly taxable at the ARF owner's marginal tax rate. If drawdowns are not made from ARFs, a notional or imputed drawdown amounting to 5% of the assets in the ARF is deemed to take place each year, which notional drawdown is liable to tax at the ARF owner's marginal tax rate. Therefore, while money held in an ARF will not be subject to the pension fund levy, the money in the fund is taxable even where an individual does not make a withdrawal from that fund. Unlike the pension fund levy which is temporary, the 5% annual notional distribution requirement, which was increased from 3% in the last budget and Finance Act, is permanent. The ARF option on retirement is not just available to the chosen few. It was extended in the Finance Act 2011 to all defined contribution pension arrangements in respect of the main benefits from such arrangements. Members of such schemes and defined benefit schemes always had the ARF option with regard to additional voluntary contributions, AVCs, to pension saving arrangements.

Deputy Luke 'Ming' Flanagan asked about the position of the levy with regard to the Constitution. While it is a matter for the courts to decide what is and is not constitutional, the Minister obtained legal advice on the levy and the scheme being introduced has taken account of that advice. Deputy Luke 'Ming' Flanagan also mentioned a letter from the Irish Nurses and Midwives Organisation concerning whether pension fund administrators should pass on the levy. This issue also was raised by Deputies Catherine Murphy and Joan Collins and it will be a matter for pension fund administrators to decide how to fund the payment of the levy.

Deputy O'Dea suggested that the previous pension fund levy provided for in the Finance Act 1988 was charged on the capital gains of pension funds. This is not correct as the previous levy was charged as a percentage of the imputed income of pension funds. The imputed income was taken to be a percentage of the capital or market value of the fund. For example, if a fund was worth €1 million, it was deemed to earn an income of 9% or €90,000 and the levy was charged at a rate of 6% of this deemed income. However, to calculate the levy under this deemed or imputed income method, one still must work out the capital value or market value of the assets in the fund and consequently there is no essential difference between using the method to calculate the 1988 pension fund levy and the more straightforward method used in this Bill.

Several Members asked the reason a form of wealth tax was not introduced. There are a number of current taxes which are in effect taxes on wealth, such as capital gains tax, capital acquisitions tax and the domicile levy. Deputy Sean Fleming asked about AVCs paid by public servants. These are paid into funded pension schemes and such schemes are subject to the levy. It also should be noted that some public sector and public service pension schemes are funded schemes and as such will be subject to the levy.

Deputy O'Dea asked whether the purpose of introducing the levy was not to interfere with the current tax regime on pensions. I am aware the pension fund levy comes at a time when the gradual reduction from marginal to standard rate tax relief on pension contributions forms part of the fiscal consolidation measures in the agreement with the European Commission, IMF and the ECB over the period 2011 to 2014. In this regard, I can state the Government has initiated a comprehensive review of expenditure to provide it with a set of decision options to meet the overall fiscal consolidation objectives and realign spending with the programme for Government priorities. The review is due to be completed by the end of September 2011. The Government will then examine the findings and, in consultation with the EU, IMF and ECB, will introduce neutral changes to the detail of the EU-IMF programme of financial support for Ireland, while maintaining the overall commitment to consolidation. The Minister is undertaking to examine the scope for any change to the proposed standard rating of tax relief on pension contributions in that context. Deputy Tóibínhad previously asked whether company directors and high earners would be exempt from the levy. The assets in the pension schemes of such individuals as approved by the Revenue Commissioners under tax legislation will be subject to the levy.

The Deputy also asked whether there would be any difference in how the levy applied to defined contribution and defined benefit schemes. I do not see the difference he may be referring to, given that the levy applies at the same rate to the market value of assets within both types of the scheme on the valuation dates. Perhaps he might elaborate further on this at a later stage. As regards Deputy Tóibín's request for precise details on the exact impact and cost of the levy on individual pension holders, I am not in a position to provide those specific details. It is up to the trustees and administrators who will be chargeable under the law for the levy to decide whether and how the levy should be passed on and who should be impacted upon and to what extent, given the particular circumstances of the pension funds or pension plans for which they are responsible.

Deputy Clare Daly launched an attack on our research and development tax credit scheme. The purpose of the scheme, which is open to all companies big and small, is to encourage research and development in this country in order to improve our economy and increase employment. A credit of 25% of the incremental spend on research and development is available for this purpose and the scheme has been enhanced in most years since its introduction in order to improve its effectiveness. The latest amendment in this Bill represents a further such enhancement.

The fruit borne by the tax credit scheme may be seen in the fact that of the 79 new investments won by the IDA in 2010 from existing clients, some 37, or nearly 50%, were in the area of research and development. The value of investment in Ireland arising from these new research and development projects is about €500 million as well as involving considerable numbers of jobs. Perhaps Deputy Dalymight inquire of those of her constituents working in research and development-related projects how they would regard incentives which deliver this type of activity in Ireland.

In response to Deputy O'Mahony's call for the return of the patent income exemption and further improvements to the research and development tax credit scheme, the tax credit has been enhanced over the years and further enhancements can be considered in the future. The decision to abolish the patent income exemption relief was taken on the basis of a recommendation to this effect by the Commission on Taxation. The commission found that the relief has not had the desired impact on innovation and research and development activity and that despite various refinements to the scheme over the years, it was not a particularly well-targeted measure providing good value for money.

Deputy Michael McGrath referred to the new 9% VAT rate which is focused towards the tourism sector. The Deputy suggested this new rate should also be applied to the construction sector. As Deputies will be aware, the jobs initiative otherwise makes provision for assisting the construction industry in the form of the investment of an additional €30 million in 2011 in the national home retrofitting scheme. This will directly benefit the construction sector. In addition, separate funding in the initiative for schools, local and regional roads and smarter travel projects will also be of benefit to the construction industry. Furthermore, under EU law it is not possible to apply a 9% rate to a large section of the construction sector. In this regard, commercial construction, for example, is regarded as a parked item, for which the VAT rate may not be lower than 12%. The passing on of the 4.5% reduction in the VAT rate to the consumer is of course necessary if the initiative is to be successful. The measure will be reviewed by the end of 2012 in order to determine its effectiveness in aiding the tourist industry. If it is shown that the VAT reduction has no or little effect then the measure is open to being reformed or abolished. Deputy O'Dea raised the question of certain tourism-related services which will not be covered by the new 9% rate. These include short-term car hire, hire of caravans and tour guide services. Ireland continues to apply a reduced VAT rate to a wide range of goods and services under an EU derogation on the basis that a reduced rate was in operation for these items on 1 January 1991. However, in the majority of cases, as in the case of tour guide services, short-term hire of cars and the other items mentioned, the derogation restricts that reduced rate to 12%. These items are often referred to as parked items under EU VAT rules. Therefore, it would not be possible to apply the rate of 9% to all, or indeed most, of the economic activities that currently apply at the 13.5% rate in Ireland. While these items could in theory be reduced to a 12% rate, that could only be done if all items remaining on 13.5% were reduced to the 12% rate, as under the EU VAT directive, a member state can only have two reduced rates. Ireland will now have a 9% rate and a 13.5% rate. Furthermore, such a reduction from 13.5% to 12% for all items that will be remaining on the 13.5% rate would be very expensive for the Exchequer to implement.

The Deputy also referred to items such as domestic fuels, electricity and gas. The position in regard to these fuels is similar to that I have already outlined with regard to short-term car-hire, that is, they are parked items. It would therefore not be possible to apply the new 9% rate to them. The application of the new reduced VAT rate of 9% to the tourism sector is a key aspect of the overall jobs initiative and one which I am confident can provide a much needed stimulus for this important and highly labour-intensive sector of our economy.

As regards the suspension of the air travel tax raised by a number of Deputies, I must again clarify that the commencement of this measure is subject to an agreement being reached with the airlines to bring in additional passenger numbers. The Minister for Transport, Tourism and Sport and his officials have had discussions with the Dublin Airport Authority and the main Irish airlines about the proposed suspension of the travel tax. The measure is part of a three-pronged strategy to encourage inbound tourism. It also includes a new growth incentive scheme which has been introduced by the DAA and more targeted co-operative marketing of new routes from key source tourism markets by Tourism Ireland, DAA and the airlines to encourage more tourists to fly into Ireland. I understand the Minister has also written to all other airlines operating services to and from the State airports in relation to these proposals.

The Minister for Transport, Tourism and Sport has made it absolutely clear in all his contacts with the airlines that the Government is only prepared to commence the legislative provisions in relation to air travel tax if the airlines demonstrate a willingness to respond positively to these initiatives. The DAA is also actively engaged in discussions with the airlines in relation to the growth incentive scheme and it is ensuring the airlines are fully aware of the Government's position which is that the air travel tax measure will only be commenced when the airlines commit to deliver more tourists to Ireland. This position will continue to be reviewed in the context of traffic performance in the current year as well as stated plans by airlines for growth in future years.

I agree entirely with the many Deputies who have stressed the importance of the tourism sector. As the Minister noted in his Second Stage contribution, much economic activity within the tourism industry is highly intensive in its use of labour and this is particularly true of hotels and restaurants, recreation and entertainment. We must recover the ground we have lost in this area and then tourism can make a very substantial contribution to our economic recovery and to the creation of employment in all parts of the country.

Deputies Barry and Buttimer both mentioned the issue of companies which have difficulty in making the necessary returns of VAT to the Revenue. I can advise the Deputies that Revenue is conscious of the need to strike the appropriate balance between giving some latitude to viable businesses experiencing short-term difficulties and ensuring timely collection of tax debts. Indeed, Revenue responded to the current problematic environment as it emerged by actively encouraging businesses experiencing particular payment difficulties to engage proactively with them when issues emerge so an agreed approach can be put in place and timely compliance speedily restored.

As Deputy Pearse Dohertyis aware, the Government has committed to a review of the universal social charge. This review will be completed in time for budget 2012. As I have stated a number of times in this House, my Department is accepting submissions from all parties interested in contributing to the review and I encourage such submissions. I have also emphasised that if changes are being proposed to the USC, I would request well thought-out and workable solutions to fill any Revenue gaps created. The focus must be on maintaining the €4 billion yield. My Department is still awaiting a submission from the Deputy or his party but I do not consider that an immediate abolition of the USC and a reintroduction of the income and health levies as suggested by the Deputy as a well thought-out and workable solution. Deputy Tóibínhas claimed that the USC is a regressive charge but this is not the case. The USC is, in fact, a progressive measure. Under the USC, the more one earns, the higher a percentage of one's income is paid. When the USC is considered in the broader context of how we tax income generally, the overall effect is highly progressive.

According to a recent European Commission publication, Monitoring tax revenues and tax reforms in EU Member States 2010, Ireland has the most progressive taxation of income of all the EU member states in the OECD. If Deputy Peader Tóibínhas concerns about the taxation system, lack of progressivity should not be one of them.

Deputy Dohertyinquired about the date of introduction of taxation provisions in respect of civil partnership. As the Taoiseach stated in the House on Tuesday, a Bill providing for the necessary taxation measures for civil partnership will be brought before the Dáil shortly. I expect the Bill to be published in the coming weeks and enacted before the summer. It will provide for the necessary changes to the tax Acts arising from the Civil Partnership Act 2010 and will not include any other taxation measures, austere or otherwise.

I thank all those Deputies who perhaps do not agree with some or all of the measures proposed but who have made considered and useful contributions to this debate. As the Minister indicated, there are still a number of matters under consideration for inclusion in the Bill on Committee Stage on which he looks forward to a constructive and informed discussion. Consideration will, of course, also be given to the constructive suggestions made on Second Stage.

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