Thursday, 11 April 2019
Finance (Office of Tax Simplification) Bill 2018: Second Stage [Private Members]
I move: "That the Bill be now read a Second Time."
I am happy to speak on the Finance (Office of Tax Simplification) Bill 2018. The principal purpose of this Bill is to simplify the tax code for individual taxpayers, for companies and for the Revenue Commissioners.
Ireland has by and large a simple, consistent, efficient and fair tax system. Our tax system as it is currently configured increases tax compliance, encourages investment and growth, and attracts foreign direct investment.
The tax cost is not a simple matter of rates. For a company, large or small, there are two costs. There is the tax actually payable on profits, income and gains, and there is the administrative burden of complying with the tax code. For large companies, including the multinationals, a more complex tax structure means more administrative costs and a greater risk of non-compliance. For small businesses the complexity leads to either the failure to take up useful tax reliefs or the engagement of exceptionally expensive tax consultants.
Foreign direct investment, domestic indigenous companies and SMEs are all attracted to Ireland because of our competitive tax rates and the way our tax code is administered. This aspect is very important. Multinational companies employ approximately 230,000 people. The number employed by SMEs stands at around 970,000 according to the Central Statistics Office. These companies are the bedrock of Ireland’s industrial policy. It is crucial that we stay ahead of the curve and do not gradually take our eyes of the ball. Too many other countries are targeting the business and investment we receive. As a small open economy we cannot afford to be complacent. This is effectively the essence of the Bill. We need to ensure that our tax system remains consistent, transparent, efficient and fair.
In previous years we have seen various tax initiatives being established to encourage investment, employment, growth, and research and development. However, these initiatives have not proved as successful as they might have been. Let us consider the knowledge development box, KDB, to encourage research and development, particularly for smaller businesses. On the face of it, the KDB is an attractive prospect. Qualifying profits from patents, computer programmes and certain certified intellectual property can be charged at 6.25%.
However, the uptake is very poor. According to a response to a parliamentary question, only 11 companies have availed of it, costing the Exchequer just €9 million. It was originally budgeted to cost the Exchequer €50 million. While this seems good for the Exchequer, it is bad for business.
The key employee engagement programme, KEEP, was announced in budget 2018. It was established to enable smaller companies, particularly tech companies, to compete against the larger tech companies for key employees. However, again the uptake was very disappointing and this necessitated changes in budget 2019 to improve the uptake.
It is too early to predict how these changes will impact the take-up.
There have been similar problems with the employment incentive and investment scheme. That scheme was designed to encourage investors to invest in indigenous companies similar to the old business expansion scheme. It is designed to encourage investment and employment. It too has been marked with delays and complexity. That simply puts off businesses.
Another example of complexity that this newly established office could examine is the tax treatment of food supplements. There has been a long-standing problem on what products are taxed exempt and what products are liable for VAT. The Revenue Commissioners made a decision that would have had extensive impacts on customers and then at the last minute they postponed their decision so that the Tax Strategy Group could examine the issue. That is yet another prime example of why such an office would be beneficial.
Issues have arisen for individual taxpayers. There are many tax reliefs, allowances and credits for them. They are put in place to provide supports for individuals and families. For example, the home carer tax credit of up to €1,500 is not being claimed by everyone. It is designed to help families where one parent works in the home to care for one or more children or a dependant. Many people are not aware of this tax credit and may be missing out on it. According to the Central Statistics Office, there are currently 146,698 family units where one parent stays at home to care for children. The figure is likely to be higher than this when one factors in those who are caring for a dependent person. According to details published by the Department of Finance, only 85,900 families claim the home carer tax credit. It likely that many families are not benefitting from this credit because they are simply not aware of it. This is yet another example of what the office of tax simplification could examine. There is no point in reliefs being put in place if people are not aware or unable to apply for them.
The tax system is particularly complicated and exceptionally hard to navigate for older people who are bamboozled by all the different rules. This serves only to place them under undue pressure and stress that they can well do without.
Simplifying the tax code could also increase compliance among taxpayers. Some taxpayers are underpaying tax simply because they fail to fully understand their tax liability. Ignorance is not a defence but one simply needs to read the business section of the newspapers to see countless letters being written in to find out the tax implications for people's circumstances. Behavioural economists have long stated that if one wishes to get people to do something one first needs to make it simple. Tax cannot always be simple but I am sure there are areas that can be improved, and that is what this proposed office would be for.
Other areas where the proposed office could bring forward useful recommendations include inheritance tax and the tax on pensions. Inheritance tax is liable often at a difficult time when a loved one has been lost. It has been said by various tax advisers that this system puts undue stress on people suffering the loss of a family member. The office we propose should be established could examine ways at making this particular tax more user friendly for people. The UK office, upon which this Bill is based, has been instructed to examine this very issue.
The tax treatment on pensions is also a challenging aspect for taxpayers and often detracts people from investing in pension funds. Many people are not sure of the tax incentives for contributing to pension funds and are unsure of the tax penalties for the early extraction of funds from a pension fund. This is a key reason many people do not invest in a pension fund. It has been acknowledged that fewer than 47% of workers invest in a private pension. This will have a profound impact and tax plays an integral part of the problem.
As I alluded to earlier, the core reason for this Bill is to simplify the tax code and the administrative burden on taxpayers and companies. In an ever changing global environment it is essential that Ireland remains ahead of the curve when it comes to a consistent, simple and efficient tax system.
The Bill would establish an office of tax simplification, which would examine areas of tax, both the laws and the administration, and report on ways in which the tax system can be made simpler for the users. Currently, the Tax Strategy Group is in place and it publishes its work in the lead up to the budget every year. The work of this group offers a valuable insight into possible changes in the tax regime, from income tax to corporation tax to value added tax. This Bill does not seek to replace the group, simply to complement it. While the group will continue its work on areas of general taxation, the office of tax simplification would specifically look at making the tax system easier for all users concerned, including the Revenue Commissioners. The office would also be able to report at any time and multiple times in any one year. This is contrary to the Tax Strategy Group which reports only once a year.
The newly established office would bring forward recommendations on how the tax code could be simplified. Crucially, this Bill has a time bound element to it so that the office would not simply turn into another quango. A similar office was established in the UK. Currently, that office has been asked by the Chancellor of the Exchequer to recommend ways to simplify inheritance tax in the UK. The current tax director of the office in the UK spoke regarding inheritance tax and said: "Some of those who deal with inheritance tax will be private individuals who are already dealing with difficult circumstances, so the complexities of the administrative aspects of this tax may be particularly challenging." This particular case sums up perfectly the role of the proposed office of tax simplification and how useful it could be in an Irish setting.
The cost of doing business in Ireland must be monitored closely at all times. We are a small open economy on the periphery of Europe and it is imperative we remain competitive in an ever more competitive global environment. Simply put, if another country has a better offering, it will get the investment and the jobs.
It is important to note the benefits a simple code would mean for the Revenue Commissioners. It would be easier for them to determine whether an individual or company is tax compliant. A simpler tax code would serve to improve compliance and assist them in focusing on the real tax cheats in our society.
I will summarise the sections of the legislation. Section 1 provides a number of simple definitions for the Bill. The key one is the definition for the office of tax simplification or OTS for short.
Section 2 simply refers to the Schedule which outlines the operational aspect of the office.
Section 3 outlines the functions of the OTS. The OTS must provide advice to the Minister for Finance on request of the Minister. It can also report to the Minister upon its own volition. This section defines the tax system as the law relating to, and the administration of, relevant taxes. This is important as the office does not simply have to focus on the tax code but also the administration of the tax code. The relevant taxes that the office can report on are the taxes collected and managed by the Revenue Commissioners. PRSI and other national insurance contributions collected by the Revenue Commissioners are also included.
Section 4 outlines further functions of the office, particularly surrounding reviews and reports. At the request of the Minister for Finance, the office must conduct a review of an aspect of the tax system with a view to how the tax system could be improved. After being sent to the Minister for Finance, he or she must lay a copy of the report before both Houses of the Oireachtas.
Section 5 stipulates that the office must produce an annual report on the performance of its functions. This annual report needs to be sent to the Minister for Finance and be published. The Minister must lay the report before both Houses of the Oireachtas.
Section 6 states that the office will cease in five years ensuring that it does not become simply another quango. If the office proves successful after five years, the then Government can seek to extend it through legislation.
Section 7 simply outlines the Short Title and the commencement powers of the Minister for Finance.
The Schedule outlines the operational rules of the office from the membership to the term of office. The office shall have a representative from the Revenue Commissioners and the Department of Finance. It must also have a tax director. Members of the office are to be appointed by the Minister for Finance and the term of office shall be five years. The Schedule outlines various other stipulations that I will not go into now but they cover areas such as remuneration and the prohibition on disclosure of confidential information.
To sum up, this is not revolutionary legislation. It is straightforward in its objective and it tackles a specific issue. I hope the entire House will get behind and support this Bill in order that we can obtain a simple, efficient and consistent tax code that is more competitive than is currently the case.