Tuesday, 14 February 2012
Finance Bill 2012: Second Stage
Michael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
I move: “That the Bill be now read a Second Time.”
An empty House when the Finance Bill is being introduced must mean the crisis is over.
Ireland is recovering from the most severe downturn in the history of the State with crises in both the public finances and the banking system. However, we have tackled those challenges head on and the country is now making substantial progress. We are on track to bring the deficit below 3% of gross domestic product, GDP, by 2015, the banking system has been recapitalised and the economy returned to growth last year.
The outlook is improving. The most recent Central Statistics Office, CSO, data show that in the first three quarters of 2011, GDP increased by 0.7% compared to the same period a year earlier. This was thanks to strong export growth which was due in turn to improvements in competitiveness and to Ireland’s enduring attractiveness as a destination for foreign direct investment. This strong export performance also means the current account of the balance of payments is back in surplus. GDP is set to grow again this year and to strengthen over the medium term.
Our progress is reflected in the confidence of investors in our ability to successfully tackle our economic and budgetary problems, which has greatly improved in recent months. For example, the yield on ten-year Irish bonds - the notional cost of borrowing for the Government - has more than halved, falling from 14.5% in mid-July 2011 to under 7% at the start of February 2012.
On the fiscal side, the public finances have stabilised and the budget deficit has started to decline. This year the deficit will be reduced further to 8.6% of GDP. To meet this target, budget 2012 introduced a package of adjustment measures totalling €3.8 billion. The Government is well aware these measures will have an impact on the living standards of our citizens. The consolidation package was designed so as to minimise the negative impact upon economic growth and employment. In line with a specific Government commitment, there was no increase in income tax in budget 2012.
The Finance Bill 2012 also contains several measures designed to support investment, stimulate research and, ultimately, create jobs. The Bill should be viewed as one element of a wider strategy to support economic activity. My colleague, the Minister for Jobs, Enterprise and Innovation, set out a wide range of proposals in the action plan for jobs published yesterday. We do not have limitless resources. Accordingly, we must take those we do have and apply them to areas where there is the best employment potential and returns.
Before I begin to go through the Bill in detail, I want to draw Members’ attention to several key measures to which it will give legal effect, most of which I already announced in the budget.
The relief provided under the special assignee relief programme, SARP, will be available on 30% of income between €75,000 and €500,000. However, PRSI and the universal social charge, USC, will be payable on all of the income. This incentive is about reducing the costs to businesses of attracting key individuals from abroad to work in the Irish-based operations of their employer. The relief is designed to help firms which wish to assign employees from other parts of their company to come here to expand or develop their Irish operations which will help retain or increase employment here.
The foreign earnings deduction for employees temporarily assigned from Ireland as part of their employment to Brazil, Russia, India, China and South Africa, is designed to incentivise employees to undertake marketing trips to the countries involved, with a view to increasing Irish exports to the large populations of those countries. The deduction is limited to a maximum of €35,000 per annum. A minimum of 60 days must be spent in any of the countries concerned before it can be claimed.
The Bill includes several significant enhancements to the research and development tax credit scheme as we need to encourage the productive, high value-added sectors of our economy to work our way out of the current downturn. The first €100,000 of qualifying research and development expenditure will benefit from the 25% per cent research and development tax credit on a volume basis, subject to certain conditions. This will provide a targeted benefit to small and medium-sized enterprises. In addition, the outsourcing limits for sub-contracted research and development costs are being enhanced while companies in receipt of the credit will have the option to use a portion of it to reward key employees who have been directly involved in the creation or development of the research and development process.
The Taoiseach launched a five-year strategy for the international financial services industry in July last year which contains ambitious jobs targets of 10,000 new jobs over the period. The strategy identifies a competitive and internationally respected tax framework as one of the key foundations for success. Accordingly, the Bill introduces a package of measures to support the industry. The industry employs more than 30,000 people and contributes over €1 billion in tax to the Exchequer. It is no longer based solely in Dublin with over 30% of those employed in the international financial services industry located outside Dublin.
The Bill imposes limits on the use of legacy property reliefs. These are in line with the programme for Government commitment to restrict property tax reliefs and other tax shelters which benefit very high income earners. The proposed measures reflect the findings of the economic impact assessment on the potential for restricting the property-based legacy tax relief schemes, which I published with the Finance Bill.
On this basis the Bill contains two measures. First, a property relief surcharge of 5% will be imposed on investors with an annual gross income over €100,000. This will apply on the amount of income sheltered by property reliefs in a given year. Second, in respect of accelerated capital allowance schemes, I propose introducing a cap to the effect that investors in such schemes will no longer be able to use any unused capital allowances beyond the tax life of the particular scheme where that tax life ends after 1 January 2015.
Where the tax life of a scheme has ended before 1 January 2015 no carry forward of allowances into 2015 will be allowed.
Turning to mortgage interest relief, this Finance Bill gives effect to the budget announcement that fulfils the commitment in the programme for Government to increase the rate of mortgage interest relief to 30% for first-time buyers who took out their first mortgage in the period from 2004 to 2008. As with all time limited reliefs there will be people who just miss out, which is why I have been as flexible as possible with the legislation. However, I do not intend to extend the period any further as the measure would become less targeted and very costly. The Bill also provides for my budget day announcement to reverse the previous Government’s decision to reduce mortgage interest relief rates and ceilings for those who wish to buy a home in 2012. A first-time buyer will be able to avail of relief at a rate of 25%, with a sliding scale to 20% on ceilings of €10,000 and €20,000 for single and married taxpayers, respectively. In addition, non-first time buyers will be able to avail of relief at a rate of 15% on ceilings of €3,000 and €6,000 for single and married taxpayers, respectively. The previous Government decided that mortgage interest relief would not be available for new purchases from 2013. I do not intend to alter this decision.
I will now go through the Bill and describe the main provisions contained therein. Wherever I make a reference to TCA, I am referring to the Taxes Consolidation Act 1997. Part 1 of the Bill deals with the income levy, universal social charge, income tax, corporation tax and capital gains tax.
Section 1 is an interpretation section. Section 2 deals with the universal social charge, USC, and provides for my budget day announcement on increasing the lower exemption threshold for the universal social charge from €4,004 to €10,036. The section also includes technical amendments to the application of the USC to share based remuneration and exclusion orders. Section 3 introduces an additional amount of USC to be paid by investors in section 23 and accelerated capital allowance schemes with gross incomes over €100,000. This property relief surcharge, which is effective from 1 January 2012, will apply at a rate of 5% on the amount of income sheltered by property reliefs in a given year.
Section 4 of the Bill provides for a number of changes to income tax and USC as they apply to share-based remuneration. Section 5 extends the relief on retirement for certain income of certain sportspersons to professional cricket players and consequently enables them to avail of the higher rate of relief on pension contributions made under TCA section 787(8A). Section 6, with section 91, provides for changes to the interim tax based health insurance scheme. Section 6 makes changes to the age related income tax credit for 2012. The credits will be in five year bands for individuals aged between 60 and 84 and a final band for individuals aged 85 and over.
Section 7 gives effect to the budget day announcement that the tax exemption for the first 36 days of illness benefit and occupational injury benefit will be removed. This objective of this measure is to reduce absenteeism at work. In some circumstances, for example, where an employee goes sick and continues to be paid by the employer, the employee can be better off financially on sick leave than when working. This change seeks to remove the tax exemption that applies to the first six weeks of illness benefit and occupational injury benefit in each tax year in order to avoid such a situation.
Sections 8 and 9, together with section 26, provide for the changes to the research and development tax credit scheme and mortgage interest relief, both of which I have already referred to, as well as certain other changes. Section 10 provides that those signing for PRSI credits can now qualify for the Revenue job assist scheme.
Section 11 increases the amount of fees disregarded in claims for tax relief on third level fees. For claims where any of the students are in full-time education, the disregard is increased from €2,000 to €2,250. Where all of the fees relate to part-time education, the disregard is increased from €1,000 to €1,125. These changes are in line with the increase in the student contribution announced by the Minister for Public Expenditure and Reform.
Sections 12, 13 and 14 relate to the introduction of the special assignee relief programme and the foreign earnings deduction, which I have mentioned earlier.
Section 15 addresses anomalies created by undesired interactions between the high earners’ restriction and the clawback provisions under the section 23 type reliefs, as well as the balancing charge and allowance provisions under the property based accelerated capital allowances schemes. Provision is also made to remove the proposals relating to section 23 type reliefs provided for in section 24 of the Finance Act 2011, which were subject to a commencement order. Section 16 provides that investors in accelerated capital allowance schemes will no longer be able to use any capital allowances beyond the tax life of the particular scheme where that tax life ends after 1 January 2015. I have already spoken about this.
Section 17 gives effect to a number of changes announced in the budget in the broad pensions tax area. The Bill provides for the increase from 5% to 6% in the annual imputed distribution which applies to the value of assets in an approved retirement fund, ARF, where such funds have asset values in excess of €2 million. The imputed distribution arrangements are also being extended to vested PRSAs on the same basis. Section 17 also includes provisions to mitigate the harsher impacts at retirement for certain individuals resulting from the significant reduction to €2.3 million in the maximum allowable pension fund at retirement for tax purposes, that is, the standard fund threshold, SFT.
Section 18 of the Bill amends the 1997 Act to reflect the capital acquisition tax modernisation provisions. Section 19 makes a number of amendments to the tax treatment of farmers pertaining to carbon tax computation, young trained farmers’ courses and enhanced stock relief in certain circumstances. Section 20 relates to the professional services withholding tax and makes the annual update to Schedule 13 of the 1997 Act, the schedule of accountable persons. Section 21 introduces changes to the legislative framework underpinning the new modernised electronic relevant contract tax, e-RCT, regime that came into effect on 1 January 2012.
Section 22 amends the scheme of tax relief for expenditure incurred on the restoration and maintenance of significant buildings and gardens. In order to qualify for the relief in future, the relevant building or garden must be open to the public during national heritage week. Section 23 gives effect to amendments to the relief for investment in films. The changes are aimed at encouraging compliance by qualifying companies with the reporting requirements of the scheme. Section 24 of the Bill extends to end of 2014 the scheme of relief for investment by companies in renewable energy projects which was due to cease last year.
Section 25 brings into primary legislation the changes to the employment and investment incentive, the successor to the business expansion scheme, which were originally introduced by way of a budget day financial resolution. As previously mentioned, section 26 of the Bill contains further enhancements and some largely technical and administrative changes to the research and development tax credit scheme.
Section 27 increases the tax rates for life assurance policies and investment funds by 3%. The increased rates apply to payments and deemed payments on or after 1 January 2012. Section 28 exempts pension funds from life assurance exit tax. This is in keeping with the current exemption from investment fund exit tax and overall exemption for pension funds from income tax and capital gains tax. Section 29 aligns the rate of exit tax on collective investment undertakings with the rate applying to entities which are subject to the gross roll-up regime at 30%.
Section 30 amends the “equivalent measures” regime on exit tax for investment funds.
Section 31 will remove a technical liability to Irish tax arising from the exchange of units in an Irish exchange traded fund.
Sections 32, 33 and 34 will accommodate cross-border mergers of investment funds and new “master-feeder” structures envisaged under the recently implemented UCITS IV directive.
Section 35 gives effect to the increase in the standard deposit interest retention tax, DIRT, rate by 3 percentage points to 30%. The rate for certain longer-term savings products has also been increased by 3 percentage points to 33%.
Section 36 makes two minor amendments to TCA Part 8A which governs the taxation of Islamic finance transactions in order to improve the functioning of those provisions.
Section 37 modernises arrangements for the payment of encashment tax, which is a withholding tax on certain Irish public revenue payments and payments of foreign income via Irish paying agents.
Section 38 aims to improve the competitiveness of the Irish debt market by extending the exemption contained in TCA section 198 to include certain interest payments, namely eurobonds, wholesale debt instruments and asset-covered securities.
Section 39 contains a technical amendment to TCA section 80A to ensure the provision operates as originally intended.
Section 40 amends TCA section 110 in three ways. First, it extends the range of carbon offsets that a section 110 company can acquire to include forest carbon credits. Second, it amends the definition of a qualifying company to require notification to Revenue within a specific timeframe. Third, it ensures the Finance Act 2011 amendments do not apply to a company operating in the State through a branch or agency.
Section 41 introduces a new TCA section 452A to amend the interest deductibility rules to facilitate cash-pooling business in the corporate treasury sector.
Section 42 makes amendments of a technical nature to TCA sections 238 and 241.
Section 43 aims to provide clarity and certainty on two specific issues in so far as the transactions of companies operating within the EU emissions trading scheme are concerned.
Section 44 extends the scheme which provides relief from corporation tax on the trading income and certain gains of new start-up companies in the first three years of trading so as to include start-up companies which commence a new trade in 2012, 2013 or 2014.
Section 45 adds the Sustainable Energy Authority of Ireland and the Food Safety Authority of Ireland to the list of State bodies that are exempt from tax on certain income thereby avoiding circular payments into and out of the Exchequer.
Section 46 extends the current group relief rules in TCA section 411 so losses can be transferred between two Irish resident companies where those companies are part of a 75% group involving companies which are either resident in a jurisdiction with which Ireland has a treaty or quoted on a recognised stock exchange.
Section 47 concerns a minor technical amendment to our transfer pricing legislation.
Sections 48 and 49 amend the computational rules under which relief for foreign tax, suffered on royalty payments, is given.
Section 50 amends Irish tax legislation to reflect recent changes in company law.
Section 51 extends the existing unilateral credit relief, which currently applies to royalty payments, to include equipment lease rental payments. This measure will be of particular benefit to the aircraft leasing industry.
Section 52 provides for the taxation at 12.5% instead of 25% in the hands of an Irish resident company of foreign-sourced dividends paid out of the trading profits of privately held companies in countries with which Ireland does not have a tax treaty but which have joined the OECD Convention on Mutual Administrative Assistance in Tax Matters.
Section 53 provides for a schedule of required amendments to the TCA resulting from the termination of manufacturing relief at the end of 2010.
Section 54 provides for the capital gains tax, CGT, rate increase from 25% to 30% as I announced on budget day.
Section 55 provides that shares in an Irish incorporated company will be treated as located in Ireland for CGT purposes, to ensure they are within the charge to Irish tax.
Section 56 will ensure the occurrence of a contingent liability will not lead to a repayment of tax unless the liability has been paid.