Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I welcome the opportunity to speak on Second Stage of the Finance Bill 2019. It was nearly 12 months ago that our party leader, Deputy Micheál Martin, against the backdrop of Brexit uncertainty, decided to extend the confidence and supply arrangement to ensure that there was no general election in this country in 2019. I welcome the Brexit agreement reached recently. I commend all those who have worked so diligently, patiently and professionally in Ireland's best interests over the last number of years on Brexit. I commend the negotiating team in Brussels, led by Michel Barnier, and our European counterparts who stood by Ireland and did all that was possible to uphold the Good Friday Agreement. Regardless of what happens in the coming days, weeks and months, there is no mistaking that Brexit still represents one of the challenges of our age. The uncertainty, so pervasive across the water last December, persists to this day. As we sit here, we still do not know entirely what will happen by 31 October and we do not know precisely what kind of Brexit will materialise in the end, if any at all.

Fianna Fáil decided to facilitate the passage of this budget, and subsequently this Finance Bill, because it was clear to us that Ireland needed a stable Government at this time. We must all continue to do everything in our power to protect jobs from the cold reality of Brexit. People up and down the country, in urban and rural areas alike, are rightly concerned over the future of their livelihoods when Brexit, no matter what form it takes, materialises. A no-deal Brexit, though now unlikely, is still possible. That means the assumptions underpinning this budget still stand. With more than €16 billion in goods exported from Ireland to the UK, a no-deal Brexit would represent a step change in Ireland's economic relationship with the UK. A no-deal Brexit brings with it job losses and a return to deficit spending. It will not only lead to east-west checks on goods moving between our two countries but would also inevitably mean checks going north and south.

The Brexit deal announced last week is no doubt better than a no-deal scenario. However, it would be a mistake to call a Brexit under this existing deal a soft seamless Brexit. A hard Brexit is still a possible outcome, especially when one considers the changes from the deal agreed with Theresa May, in that the UK will, in effect, leave a customs union in a scenario where no free trade arrangement is agreed, so tariffs could potentially apply from the end of 2020.

It will be difficult for those businesses importing goods from Great Britain as the reality of regulatory divergence comes to pass. At the end of it all, we could be back here again at the end of 2020, still finding ourselves on the precipice of the UK walking away, essentially without a deal. Free trade agreements can take many years to finalise and oftentimes can take over a decade. Yet as it stands under this deal, the EU and the UK will have just 12 months. I do not believe anyone thinks that is a realistic timeframe. Brexit is not going away, regardless of whether this deal is ratified by the House of Commons or not. I would urge the Minister and the Government to be forthcoming when time permits with an economic impact assessment of the deal reached last week and what that means for Ireland.

At the outset of negotiations for budget 2020, Fianna Fáil wanted assurances the industries most impacted by a no-deal Brexit would be protected insofar as is possible. Those sectors are as follows: the tourism sector, which relies heavily on UK tourists coming here and spending their hard-earned cash; the agrifood sector, which exports most of its produce to the UK; and the small businesses throughout the country that find it far more challenging to adapt to an ever-changing environment. Fianna Fáil insisted these sectors were given the support they needed to get through the potentially choppy waters of a no-deal Brexit scenario. While the budget day announcement of a Brexit fund, principally for these three sectors, is to be welcomed, we have concerns about whether this funding can be deployed in a timely manner if a no-deal Brexit comes to pass. The various loan schemes announced in the past year or so have not had a significant uptake. They are tied up in too much red tape to be deployed in an efficient manner. Of the funding announced on budget day for a no-deal Brexit, it is unclear whether it has been granted state aid approval. Perhaps as the finance Bill moves through the Oireachtas, the Minister can provide clarity on that issue. It is critical that if a no-deal Brexit were to materialise at the end of this month or at the end of January, that this funding be deployed quickly and effectively to the businesses that need it most.

I would like to know what happens if this deal is ratified by the House of Commons. Based on our understanding of the Minister's speech on budget day, the €650 million in funding will not be deployed if a no-deal Brexit is prevented. Aside from Brexit, Ireland faces many risks in the coming 12 months and beyond. Growth in our economy is set to slow, regardless of Brexit happening next year. Globally, we are seeing more protectionism and a ratcheting up of trade tensions. As we speak, tariffs are set to increase on certain goods being exported from the EU to the US. As a small and open economy, Ireland is particularly vulnerable to changes in global trade.

In my budget day speech, I outlined the risks Ireland faces in terms of our reliance on corporation tax receipts. We know 45% of our receipts in 2018 come from just ten companies. Undoubtedly, these companies are all foreign-owned multinationals. That is about €4.7 billion in tax from ten companies alone. Let us be in no doubt the global corporate tax regime is changing rapidly, and this has the potential to have very significant impacts on Ireland. The OECD has recently released details of the new base erosion and profit shifting, BEPS, roadmap that could change the way corporation tax rights are allocated between countries and could well pave the way for a global minimum effective tax rate for companies. While Fianna Fáil will always defend our 12.5% corporate tax rate, there is little doubt these changes will reduce its effectiveness in attracting foreign direct investment, FDI, to Ireland. In the past 24 hours alone, we have seen moe than 800 job losses confirmed in Shannon and in my constituency in Cork South-Central, so there is no room whatsoever for complacency.

We need to rebalance the economy towards the small and medium enterprise, SME, sector. We will always support the FDI that comes to Ireland and we need to work hard to continue to win new business for our country. However, we also need to ensure we have a supportive tax and enterprise environment for SMEs throughout our land. The Minister announced various changes to the KEEP scheme, the employment and investment incentive scheme, EIIS, the SARP scheme, the foreign earnings deduction scheme and the research and development tax credit. These changes, I hope, will reduce the amount of red tape and open these incentives to more firms, whether they are pre-trading start ups or developed companies seeking to grow.

While I welcome the changes announced, I regret to say we have been here before. Tax schemes are proposed that in principle would assist SMEs, but when we get down to the nitty gritty in the finance Bill, what was proposed as a tax incentive can turn into an administrative nightmare. Business owners applying for these schemes need to put in a lot of hard work or spend a large amount of money on expensive tax consultants and accountants. The logical conclusion therefore, is that SMEs will sometimes walk away and not apply for these reliefs. Take the KEEP scheme for example. It was sought by industry for quite some time. SMEs, particularly in the tech industry, were looking for a mechanism by which they could compete with larger companies for talent. In budget 2018, the Minister first announced the KEEP scheme and the subsequent finance Bill placed that scheme into law. The hope at the time was that the scheme would do what it said on the tin. Unfortunately, the reality was different. In budget 2018, it was anticipated the KEEP scheme would be a game changer for many of these firms. However, we stand here today and only 87 employees have signed up for it. I note the changes to the various tax schemes announced by the Minister on budget day, but we must ensure the provisions in this finance Bill do exactly what they are supposed to do and help, not hinder SMEs to progress and grow.

I note too the areas that were not covered in this budget. The self-employed are still waiting to be treated equally with PAYE workers. We are seeing some progress again in this budget, but we are not seeing equalisation. The entrepreneurial relief has been left unchanged. As the UK gets ready to leave the EU, our relief stands in contrast to the UK offering, and not in a positive light. We still have the lifetime limit of only €1 million, which is paltry when compared to the £10 million limit that operates in the UK. The capital gains tax, CGT, rate in general stands as among the highest in the EU at 33%. I note just last weekend in The Sunday Business Post, the Irish Medtech Association made it clear Ireland's high capital gains tax rate is proving a big challenge for the sector. According to that article, there has been a notable increase in the number of entrepreneurs looking to invest abroad due to our CGT environment. Not only do we need more progress on entrepreneurial relief, we also need to see progress on the headline CGT rate.

I welcome the introduction of the de minimisrelief for the betting duty. l, along with many other Deputies, raised issues around the application of betting duty last year during the budget and the finance Bill. What has been announced does not go far enough and it will not stem the tide we are witnessing of small and independent bookmaking firms having to close many outlets.

I turn to the issue of VAT on food supplements. I note section 54 of the Bill, which moves to provide that food supplements will be subject to VAT at a rate of 13.5%. The story behind the VAT treatment of food supplements is a long one. Food has a 0% rate applied to it, and food supplements were previously also treated in this way. That is the historical context. Back in 2018, issues were raised with many of us on how the Revenue Commissioners was treating food supplements at a regional level for the purposes of VAT. There seemed to be confusion and inconsistent treatment on what was food and what was a food supplement and what was the difference. I raised this in last year's finance Bill. We made it clear then this was an emerging issue that had to be dealt with. At the time the Minister accepted there was an issue and committed to having it reviewed in the tax strategy papers. After the commitment was given, the Revenue Commissioners made a separate decision and indicated that from the end of March 2019, food supplements would be subject to the 23% VAT rate. Its determination in this regard stems from its contention that there is no specific reference in legislation that warranted the 0% treatment for food supplements. This was a huge change for the industry and instantly put many businesses at risk of closure. At that time, along with others, we called on the Revenue Commissioners to put off the application of the 23% VAT rate, pending the outcome of the work of the tax strategy group, TSG. It did not help matters when the Taoiseach rose to his feet in this House and referred to food supplements as "snake oil." The Taoiseach's glib response was insulting to the people who use food supplements and the businesses that sell them. Thankfully, at the time, the Revenue Commissioners agreed to defer its decision until a public consultation took place and the tax strategy group had an opportunity to examine the issue. The issue, as it stands, revolves around the reason a zero rate of VAT was applied to food supplements. One side of the debate argues the Revenue Commissioners originally deemed food supplements to be food. which under legislation, is zero rated for VAT. The Revenue Commissioners argued this was a concession, though it only started using that term in the past year or so, and therefore, in its view, there is no basis in legislation for food supplements to be zero rated. Consulting with the sector, I have been briefed in detail on the state of affairs. I have seen documents released under the Freedom of Information Act 2014, which indicate food supplements were classified by the Revenue Commissioners as food products. I understand this case will end up in the courts next year and we await the outcome of that process. I understand the Revenue Commissioners is independent and cannot be instructed by this House or the Government except of course through the laws we enact here.

The Minister might clarify why he is not in a position to legislate for food supplements to be zero rated. I have no doubt this issue will be debated at length on Committee Stage. Why was the particular rate selected? Why was the 9% VAT rate, which sits within our VAT code, not selected?

A legacy issue has also resulted in confusion. Many businesses have applied a zero rate of VAT and were cleared as being tax compliant by the Revenue Commissioners. Suddenly, Revenue changed its view and these companies found they had large tax bills. They received threatening letters and their businesses were put at risk. We need this issue to be dealt with in a comprehensive and fair manner because it has been all over the shop until now.

Here we are again in 2019 having to close loopholes for certain fund structures operating in Ireland. No matter how many amendments we make to the law, these funds continue to be one step ahead of the curve. Highly paid lawyers and accountants are continuously finding ways of extracting money out of these funds without paying significant taxes or any tax at all. First, we had the section 110 structure that we and others highlighted over time. Loans with artificially high interest rates were used to extract money out of these funds without tax being paid. We always seem to be a number of steps behind the curve and we desperately need a mechanism that identifies these aggressive tax structures to close the loopholes much quicker or, ideally, ensure we design laws whereby they are not there in the first place.

I welcome the changes made in the budget on IREFs and REITs. These funds are earning large profits in Ireland and they need to be taxed appropriately. The introduction of limitations on interest expenses for IREFs based on debt-to-property costs and on an income-to-interest ratio is to be welcomed. The system has also tightened for REITs. Under the legislation, proceeds distributed from the disposal of a rental property will be subject to DWT. These two anti-avoidance measures alone are projected to bring in €80 million a year. One must ask how much would have been brought in if these loopholes had been identified and closed much earlier. We need to deal with this matter comprehensively on Committee Stage. The Minister has indicated he intends to table amendments and we will study them closely.

The home carer's tax credit was again increased in the budget and we very much welcome this. It was a key issue for us in the confidence and supply agreement. It has increased from €1,000 to €1,600 and this is to be warmly welcomed. In the past, I have raised the issue of what I regard as a low drawdown of this particular credit. Revenue has made some progress in automatically extending the credit to people entitled to it but I continue to come across people whom I believe are entitled to it but who are not claiming it because they are simply not aware of it. We need to deal with this issue.

I want to raise the issue of how VRT is applied to hybrid vehicles. I welcome that the Minister has pushed the proposed VRT changes until 2021. The new worldwide harmonised light vehicle test procedure, WLTP, while welcome, would distort the current VRT system and reform will be needed. It would counterproductively penalise people buying newer cleaner cars. We need to take time to fully look at the impact of the WLTP changes and then reform the VRT system and widen the bands in a manner that is appropriate for 2021.

Section 50 makes a subtle change to the VRT rules that could have a significant adverse impact on hybrids. It stipulates that hybrid electric vehicles with CO2 emissions in excess of 80 g/km will not qualify for VRT relief. With a new VRT system coming into place in 2021, this is an issue that will impact 2020 sales only. According to the people in the industry with whom I have discussed this, 70% of hybrids sold in Ireland are above this threshold and, therefore, in 2020 will not qualify for the VRT relief the Minister is extending on a restricted basis. The real issue is that for the first quarter of 2020 cars have been ordered and are in the system. If people in the industry had known this change was coming they could have changed the product mix being brought to the Irish market to ensure more cars qualified for the VRT relief. We will discuss this issue with the Minister in detail on Committee Stage. He should consider pushing it out by a couple of months to allow what has been ordered to wash through the system. Otherwise, it will be distorted.

Changes were made on budget day by way of financial resolution that addressed certain stamp duty issues relating to share transactions. Financial Resolution No. 5 and section 60 of this legislation impose a stamp duty charge where there is an agreement to acquire a target company and that target company enters into an arrangement whereby the shares in that company are cancelled. Under previous provisions, this was a method to sidestep the 1% stamp duty charge. While I am totally in agreement with the change made by the Minister, in the interest of tax certainty he should consider including a provision that would exclude transactions where shareholders have been notified of this transaction.

Issues have also been raised about the rebate scheme announced for the haulage industry as a consequence of the increase in carbon tax. It was announced on budget day that this scheme would compensate the industry for increases in the tax. Section 41 outlines how the scheme will work. There are concerns that the parameters put in place by the section still leave hauliers in a worse-off position. We will tease it out on Committee Stage. I ask the Minister to consider the possibility of backdating the provisions to when carbon tax was increased on budget day.

Almost 12 months ago, Fianna Fáil decided to extend the confidence and supply arrangement to ensure there was no election in 2019. The backdrop of that decision was the uncertainty and chaos that was evident in Westminster. As we gather this evening to discuss budget 2020 in legislative form, that uncertainty persists and is equally relevant. We still do not know what Brexit will materialise or when it will materialise. As a party, we will engage constructively, as we have done on previous budgets, on Committee Stage with all Members to tackle the issues I have outlined and many others I have not had an opportunity to cover in a short Second Stage contribution. We look forward to engaging with the Minister and all Members on Committee Stage.

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