Tommy Broughan (Dublin Bay North, Independent) | Oireachtas source

Budget 2020 needed to be a dynamic, proactive budget to protect the incomes of our people facing the challenge of Brexit and climate change actions. In the event, two weeks ago, the budget was a regressive imposition on huge cohorts of society, effectively cutting the real incomes of families and citizens on social protection and those in lower-paid jobs. Despite the concerns repeatedly expressed by the Irish Fiscal Advisory Council and civil society agencies like Social Justice Ireland, and the regressive increase in carbon tax, there was no attempt to widen the tax base and lessen Ireland's serious tax dependence on the corporation tax being paid by a small number of multinational companies. As Deputy Michael McGrath said earlier, 45% of it is paid by just ten companies.

Despite much good work being done by the Department of Finance in the tax strategy group papers, for which we thank the Department, there was no effort whatsoever in budget 2020 to address the huge cost of tax expenditures to the Irish Exchequer, excepting the Minister's effort to address the very serious and growing risk from the hard Brexit that has now been approved in principle by the UK House of Commons. Budget 2020 was largely a non-event. The Finance Bill 2019 before us is a fairly similar exercise, which despite a number of major insertions into the tax code, does nothing to ease the tax burden on lower-income citizens and families or address the medium and longer-term sustainability of corporation tax and the ongoing large annual leakage from national revenue through tax expenditures.

Almost one third of the Bill concerns a new Part 35A of the principal Act to reform the provisions on transfer pricing in section 26 and a new Part 35C to implement the EU Directive 2016/1164 on hybrid mismatches in section 30. Transfer pricing refers to aspects of inter-company pricing arrangements between related business entities and includes inter-company tangible and intangible property transfers and finance transfers. The changes on transfer pricing are being introduced to bring our tax legislation into line with the 2017 OECD transfer pricing guidelines, and this new Part 35A of the principal Act will apply from 1 January 2020.

I understand that Irish transfer pricing rules currently apply to trading transactions that are chargeable to tax under Schedule D class 1 or class 2 of the Taxes Consolidation Act 1997. The new rules respond to reforms proposed in the Coffey review of the Irish corporation tax code, which is welcome. The new section on transfer pricing also follows on from the Department of Finance feedback statement following the earlier public consultation. Of course, the OECD 2017 transfer pricing guidelines in section 26 replace the existing 2010 guidelines. The new section extends the transfer pricing rules to cover cross-border non-trading transactions. It removes the pre-July 2010 exemption for grandfathered arrangements and extends the rules for national capital transactions.

It is to be hoped the new rules will bring less bureaucratic transfer pricing documentation to SMEs. It has to be asked, however, what real impact this modernisation of transfer pricing rules will have on increasing tax flows to the Exchequer. Is it expected that companies will utilise further tax avoidance measures around transfer pricing? Other Deputies referred to this. It is like a cat-and-mouse struggle the whole time with some of these companies. I note for example that the budget 2020 tax policy changes report published by the Department of Finance with budget 2020 gives a yield of only €10 million in a full year from both the transfer pricing and anti-hybrid rules changes. That is a very small sum in the context of the massive flows of money in these companies.

The new 11-chapter amendment in section 30, inserted into the principal Act after Part 35B, concerns hybrid mismatches and also further implements EU Directive 2016/1164 of July 2016. This is the EU anti-tax avoidance directive, ATAD, and the aim of the new anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of a financial instrument or entity under the tax codes of two or more jurisdictions to produce a tax advantage in the so-called hybrid arrangement. Associated enterprises are defined as holding a certain percentage, 25% or 50%, of the shares, voting rights or rights to profit in another entity or if there is another company that holds that percentage in both entities. Companies included in the same consolidated financial statement, or where one entity has significant influence on the management of another, will also be considered associated companies under the new Part 35C of the principal Act.

The new chapters 7, 8 and 9 of this Part on tax residency mismatches, on imported mismatch outcomes and on so-called structured arrangements seem valuable innovations into the Irish tax code. We will get a chance to discuss them further on Committee Stage. Will the senior Minister confirm that all the specific situations set out in ATAD, which goes through very specific situations, are now covered by the new Part 35C? The new rules apply especially in fund and financing structures when companies make payments that give rise to a tax deduction in Ireland, but no other country taxes the associated receipt by reason of hybridity. The types of mismatch outcomes that may arise seem very complex and may be difficult for Revenue to police when they come into effect after 1 January next year, given that hybrid financial instruments are broadly those that are treated as debt in one jurisdiction but as equity in another. The hybrid entity is often seen as opaque in one jurisdiction, often in our jurisdiction, but transparent in another.

Last year the Parliamentary Budget Office, PBO, produced an interesting briefing on tax expenditures in Ireland, briefing paper 13 of 2018. This was in response to requests from a number of members of the Committee on Budgetary Oversight, including me and Deputy Boyd Barrett, for more information and consideration of the massive cost of tax expenditures. Indeed, I raised this very issue with the Taoiseach on Leaders' Questions shortly after he took office. I think it was the first time I did Leaders' Questions with him. The Parliamentary Budget Office report called for a definitive list of benchmark measures and tax expenditures that are in effect in Ireland. The PBO also asked for alternative measures for estimating the cost of tax expenditures given the underlying inherent weaknesses in the standard revenue forgone method, which I think the Department is still using. The final revenue forgone methodology incorporating behavioural effects and the introduction of different policy measures were advocated, rightly, by the PBO, which also asked that the data provided by the Revenue Commissioners and the data of the Department of Finance should be consolidated, notwithstanding general data protection regulation, GDPR, and privacy considerations, in respect of the cost of tax expenditures.

While there has been some improvement in the review process for tax expenditures by the Department of Finance, the PBO and the Committee on Budgetary Oversight, of which I am a member, have also called for systematic ex antereviews of all tax expenditures to assess their appropriateness and planned implementation. However, there is no such detailed ex anteevaluation for changes in this Finance Bill beyond the cursory estimates in the budget 2020 tax policy changes document. We do not know what a lot of these measures are going to cost or what kind of revenue they are going to bring in. On base erosion and profit shifting, BEPS, implementation for corporation tax, that document estimates the anti-hybrid rules changes and the reforms of transfer pricing together as worth just an additional €12 million to the Exchequer, as I said earlier.

A key criticism in the PBO report on tax expenditures is that, once enacted, tax expenditures are not subject to regular parliamentary debate and scrutiny, unlike directly voted expenditure, where we can keep coming back to areas like health and housing. The cost of these tax expenditures is massive. The PBO estimates the cost at €4 to €5 billion per annum in 2014 and 2015 and at more than €5 billion in 2016. The research and development tax credit alone was costed at €670 million in 2016 at its last review; capital acquisitions tax, CAT, agricultural relief cost €141 million in 2017; and film industry relief cost €88 million in 2015. In the same year, relief supporting business cost €559 million and the cost of tax expenditures relating to share-based remuneration cost almost €74 million in 2016. These are massive expenditures by the State. My colleague, Deputy Connolly, drew attention yesterday to an elderly woman waiting for five hours on a trolley and ending up on the ground in great distress for many hours. These are incredible expenditures in the context of what is wrong with health and housing.

This Finance Bill anticipates some of the serious difficulties for business as we face into some type of Brexit, and it looks like the Brexit on the side of England, Scotland and Wales is going to be a very hard one. However, the costs of benefit-in-kind in section 5; the special assignee relief programme, SARP, in section 8; the key employee engagement programme, KEEP, in section 10; the living city initiative in section 17; distributions in section 22; and scientific and certain other research in section 24 must be closely invigilated. The budget 2020 tax policy changes report estimates the cost of all of these more or less together as being €80 million in total in a full year. Where is the breakdown on these tax expenditures and on the exact cost of these reliefs being rolled over into 2019? Deputy Paul Murphy has just spoken about SARP, a very unfair expenditure that is being rolled over to December 2022. It is hoped we should have a new Government by then. When the impact of direct taxes, such as the increase in carbon tax from €20 to €26 per tonne of carbon dioxide emitted in section 44, is examined, the Department of Finance is able to come up with a very precise figure of €130 million in a full year. Likewise, the introduction of a nitrogen dioxide charge in section 49 is estimated to bring in €25 million in a full year.

The Irish financial crash under the austerity Government spawned our current desperate homelessness and housing crises and the arrival of the vulture property companies, which were welcomed here by the former Minister for Finance, Deputy Noonan, who told us that vultures perform an essential task in the ecosystem by picking the carcass clean. In this case, however, the carcass comprised vulnerable Irish citizens and households. The Department of Finance prepared a valuable briefing on real estate investment funds, Irish real estate funds, IREFs, and section 110 companies in July 2019, as part of the tax strategy group papers. Deputies are grateful for all the work the Department has done in this regard, which has helped to inform us when we approached this Bill and has informed the work of the Committee on Budgetary Oversight and the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. This explained the evolution of real estate investment trusts, REITs, as quoted companies and collective investment vehicles to hold rental property, which started in the United States in the 1960s and has now spread to more than 35 countries, including something like 14 EU countries, based on the principle that only the distributions are taxed.

The Kenny-Gilmore Government introduced a very pliable tax regime for these vehicles in the 2013 Finance Act. I refer to Part 25A of the Taxes Consolidation Act 1997. Section 23 of the 2016 Finance Bill introduced a new tax regime for funds that hold IREF assets. During 2016 also, issues arose with the use of section 110 structures to avoid tax. Sections 28 and 29 of the present Bill on REITs and IREFs seem very small, positive steps to making these entities contribute a bit more fairly to the Exchequer, although the changes in the 2019 Bill for both REITs and IREFs seem to yield only €80 million in a full year. REITs will also be subject to tax where they claim deductions for payments that are not wholly linked to their property rental business.

As indicated in budget 2020, IREFs, will be subject to tax at 20% on certain deemed income. I presume further details on REITs' and IREFs' tax returns and compliance measures will be available to us on Committee Stage.

Section 60, which inserts a new section 31D into the principal Act, seems an important useful anti-avoidance measure since stamp duty of 1% will apply where court-approved schemes of arrangements are used in acquiring Irish companies, including REITs. Given the increasing shift to private renting sponsored by this Fine Gael-Fianna Fáil Government, this Finance Bill, like every Finance Bill since the State was formed, clearly shows these parties relentlessly working on the side of the massive property and developer industry which has such powerful allies in the media and across the professional classes.

Will the day ever come when supernormal profits from this grotesque industry will be clearly and fairly taxed in a Finance Bill? Section 66 in Part 6 of the Bill introduces the new Chapter 3A implementing the mandatory automatic exchange of information in relation to reportable cross-border arrangements. The new clause 3A inserts EU directive 2018/822 of May 2018 amending directive 2011/16/EU into the Irish tax code. This also seems a welcome improvement to the principal Act. EU directive 2019/22 is colloquially known as DAC 6 and imposes new obligations on intermediaries or taxpayers who enter into certain cross-border arrangements. It facilitates the exchange of information between the tax authorities across the European Union and the intention is to detect and deter aggressive tax planning and tax avoidance with an EU cross-border context. Perhaps the Minister will expand on the role of intermediaries and hallmarks on Committee Stage.

One point I wish to mention, which I mentioned earlier at the Committee on Budgetary Oversight, is that when most legislation comes in here, Deputies receive a full and detailed background briefing on it. The only Bill on which we do not appear to receive such a briefing from the Library and Research Service or so far from the Parliamentary Budget Office is on the Finance Bill, which is a 120 page document. Perhaps that is something that the Ceann Comhairle, when he gets a chance, could take up on our behalf.

The Taoiseach, Deputy Varadkar, continually held out the prospect of tax improvements for ordinary taxpayers during the run-in to budget 2020. Of course, tax bands and credits are almost completely frozen in budget 2020 and this Finance Bill. The increase in the home carer credit to €1,600 in section 3 and the earned income credit to €1,500 in section 4 are very welcome, as is the one year extension of the reduced rate of USC for medical card holders.The other Chapter 4 income tax improvements, including the training allowance payments, other education related payments, and certain pension reliefs are also welcome. In general, however, relief for income tax payers on lower and middle incomes are totally lacking in this Finance Bill. This reality clearly shows the Government's intention to make ordinary taxpayers and social protection recipients pay for the Brexit uncertainty and crisis and for climate action remedial measures, despite all the talk about dividends from hypothecated taxes and so on. There is no word of that in this Bill.

As report after report of the Irish Fiscal Advisory Council has urged, net policy spending can be significantly increased in desperately needed areas like health and social housing. This Fine Gael-Fianna Fáil regime, however, has resolutely set its face against measures like significant taxation of the property industry. In my budget submission to the Minister, I advocated, for example, an increase in the vacant site levy to 25% to deter land hoarding by developers which would realise more than €100 million a year and a 43% tax rate on earnings above €100,000 per annum, which would bring in nearly €400 million to the Exchequer.

A fortnight ago, the well-known economist, Mr. David McWilliams, cogently explained in The Irish Timesthat "taxing the ultra-wealthy makes economic sense". Mr. McWilliams referred to estimates and data on the wealthiest cohort of Irish society. Both the European Central Bank's Household Finance and Consumption Survey, HFCS, and the Credit Suisse Bank give revealing insights into wealth in this country. The European Central Bank's HFCS shows that the top 5% of the Irish population owned almost 38% of all Irish wealth and the top 1% owned an extraordinary 27%. That would also include land, valuable assets, stocks, shares, etc. Mr. McWilliams reports that a sliding wealth tax of between 0.5% and 5% on the top 1% or 5% of the population would yield a minimum of €2 billion, that is putting 0.5% on the top 1%, up to an incredible €20 billion for the Exchequer, if 5% is put on the top 5% of the population, who control over a quarter of our wealth.

We had that discussion several times at the Committee on Budgetary Oversight, with Irish Fiscal Advisory Council and the Minister. There are resources and it is coming to a time, astonishingly, even in countries like the United States, where legislators are beginning to think seriously about returning to the kind of wealth tax and high-income regimes that we had right down to the Thatcher and Reagan period, where the wealthiest in society, those who can most bear the cost of providing a decent, humane health system, providing housing for those who need it, and providing public transport, where those people who have those resources can make a bigger contribution. Such a wealth tax would truly broaden the tax base but there will never be such an initiative in a budget or a Finance Bill in this country until we remove both Fine Gael and Fianna Fáil from the leadership of Irish Governments.

See this speech in context