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.
I welcome Deputy Michael McGrath's Bill. The tax system has become far more convoluted in recent years as a result of the introduction of USC and its interaction with other tax rates. The average worker’s payslip now has PRSI, USC and income tax, and that is before we get into credits and reliefs. The worker might be confused but he or she has every right to be more confused about what is coming down the line. Fine Gael’s "Abolish the USC" posters may have led some naive people to believe it intended to abolish the USC without any plan at all as to what to replace it. Thankfully for our public services, that was only an election promise and was never meant to be followed through on. Then, the Taoiseach, Deputy Varadkar, won an election on a promise to merge USC and PRSI, something we have heard exactly zero about since. They are two fundamentally different taxes on different bases, and while it might have made for a clever sounding policy, it was in fact meaningless. At the most recent Fine Gael Ard-Fheis, we had a new policy out of the blue, namely, to increase the higher rate threshold to €50,000. I am not sure what the policy is this week, so it is no wonder the tax system causes some confusion.
We support the Bill and especially the concept of a time-limited mandate. Five years is a significant amount of time and I am unsure as to how the office of tax simplification, OTS, would work because tax could change significantly at each budget. There could be extremely significant changes coming down the line in our corporate tax system in regard to international developments. The Government gambit of waiting for the OECD to bring forward proposals might actually be called in sooner rather than later, and it has been estimated that the mooted changes could mean €2 billion less in corporation tax receipts each year for the State. That would be a very significant challenge, although current corporation tax receipts have exceeded projections by billions, so long-term planning should accommodate the drop, if it happens. The impact might be more felt by the Department of Health when it goes looking for its annual bailout.
In terms of income tax, Sinn Féin has shown how a progressive tapering out of credits for high earners can bring in revenue in a fair way. Crucially, the Revenue Commissioners now provide individual incomes, allowing for individual taxation. This type of transparency and granularity, allowing for better tax policies, is coming about simply because of Sinn Féin pressure.
What do the figures tell us? The top 10% of earners take home a third of all income, while the top 1% of earners now take home 11% of income. Overall, the highest earning 10,000 citizens in the State took home €5.6 billion between them. That means that, on average, 10,000 people took home more than €500,000 each in gross pay. That is the scale of inequality. Yes, there are progressive parts to the tax system but it should be more progressive. I am also deeply concerned at the planned ending of the flat-rate expenses scheme for thousands of workers next year. At the stroke a pen, thousands of workers will lose the automatic entitlement to a relief. Yet, when we try to curb the tax relief under section 110 or for vulture funds and REITs, it is incredibly difficult to do so. The tax system still favours the capital class; there is no doubt about that.
I wonder if Deputy Michael McGrath’s proposed OTS should have its mandate extended to include reports on the transparency of the tax system to see if it can shed light on dark places, like the tax affairs of multinationals or on the investment bodies buying up so much of our housing supply. That would be a very worthwhile exercise. I reiterate our support for the Bill. We look forward to working with Deputy Michael McGrath.
It would be useful to consider the proposed Bill in the context of the principles and general concepts that underpin tax policy and legislation. The OECD, in its Fundamental Principles of Taxation, notes that there are a number of broad tax policy considerations that have traditionally guided the development of taxation systems, and these include certainty and simplicity. The OECD explain that a simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements, and the Government agrees. However, the OECD lists other principles which should also underpin the design of tax systems, and these concern neutrality, efficiency, effectiveness and fairness, as well as flexibility.
If a statutory body existed to promote simplicity or simplification, this would imply that this was the most important consideration and, often, this may not be the case. There needs to be an interaction between the principles and, at times, there may be tensions and, therefore, an appropriate balance will need to be achieved. For instance, complexity rather than simplicity may result in efforts to achieve equity and to avoid unintended consequences. Therefore, where the focus of tax design or review is purely or primarily on simplification, this could reduce the focus on equity, efficiency or neutrality in the tax system.
Administrative complexity is often a direct consequence of legislative complexity, particularly where Government seeks to advance a range of policy objectives through the system of taxation. Therefore, any proposals for administrative simplification will need to have regard to the potential impact on the range of policy options. Some considerations may include progressivity, ability to pay, revenue raising measures and measures to address externalities, for example. Therefore, any proposals for simplification will need to have regard to any intended or unintended consequences to constrain the policy options available. The present arrangements, where all relevant principles are taken into account in the design or modification of the tax system, including the principle of simplicity, is a balanced and fair way of approaching the formulation of tax policy in complex environment. In addition, it would seem important to note that the Commission on Taxation did not recommend such a body. To the extent that it commented on simplicity, it was to identify it as one of a number of principles that ought to apply in the design of tax expenditures.
There is another very important point and, indeed, a distinction to be made here: tax law is the responsibility of Minister for Finance and the Oireachtas, whereas the administration of tax law is primarily the responsibility of Revenue. This distinction should not prevent the proposed OTS from making recommendations regarding both law and administration. In addition, the Bill as drafted would require the Minister for Finance to provide formal comment on any report carried out by the proposed OTS and we could have a situation where the Minister is commenting on issues that legally and correctly fall within the remit of Revenue. It is not clear how this is appropriate or how it could be accommodated. Therefore, it is important that the distinction is understood and any recommendations are appropriately directed. This means there would be significant issues to be considered in order to ensure that the proposed OTS could fulfil its mandate.
For example, the issue of taxpayer confidentiality would need to be resolved. Conducting effective reviews of administrative processes might necessitate some access to Revenue systems and records. This would need to be managed carefully and within a precise legal framework that protects taxpayer confidentiality at all times. Taxpayer confidentiality is provided for in section 851A of the Taxes Consolidation Act 1997. That section allows some disclosure of taxpayer information, for example, to the Department of Finance solely to support the policy making process, and the powers of Office of the Comptroller and Auditor General also allow access to Revenue systems. These accesses and disclosures are managed very carefully, and the relationship with the proposed OTS would need to be similarly legislated for and managed.
On the issue of simplification, we would see a potential risk in that if we make returns as user-friendly or business-friendly as possible, such simplification may see the level of information to be submitted with the tax payment reduced. This has consequences in terms of reducing data available to inform evidence-based policy decisions. This is an unintended consequence of making our tax administration system more friendly.
There are a number of studies that can be pointed to that show Ireland already fares very well on the tax compliance burden by international standards. Most obviously, in the World Bank-PwC annual report on paying taxes, Ireland ranks consistently number one in Europe for ease of paying taxes. It is questionable, therefore, how much scope there is to reduce the compliance burden further without sacrificing the ability to collect the data required to maintain accountability and performance systems in regard to tax collection and to inform policy design and implementation. Added to this is the risk that it is unlikely that any policy-neutral simplification could be achieved. It is very likely that there would be winners and losers and a potential cost to the Exchequer.
Next is the question of value, specifically, what the proposed OTS would add to the policy making and tax administration processes already in place.
The proposed legislation appears to mirror the ends and objectives of that agency. The role of the UK equivalent is to seek to reduce tax compliance burdens on both businesses and individual taxpayers. It reports to the Chancellor of the Exchequer, who retains control of policy.
From the external output of the UK agency it is not immediately obvious that specific issues of the kind it addresses could not be addressed here by the Department, Revenue or both. The proposal essentially to mirror the UK example here may mean an additional process without any improved output. The establishment of the proposed office of tax simplification, OTS, here in Ireland would certainly seem to add yet another means by which the Government would interact with tax stakeholders. Therefore there would seem to be a high risk of both overlap and duplication.
The Department of Finance already runs a number of public consultations each year. This contributes significantly to ensuring stakeholder views are considered in policy formation and development. There are also ad hoc independent reviews, several of which are underway or have recently been completed. The Department also engages in the tax strategy group process and facilitates pre-budget submissions and finance Bill submissions from interested parties. On the implementation side, Revenue also engages in the tax administration liaison committee process. During all stages of the finance Bill process there is significant discussion in the Oireachtas of the operation and shape of the taxation system, including any issues of simplification. This allows Deputies and Senators to raise specific points. Given all the mechanisms already in place it is difficult to see what real value would be added by a group narrowly focused on reports about reducing compliance burdens or simplifying legislation.
It is also possible to point to concrete examples of changes that have already taken place and improvements that have already been made. A good example is the pay as you earn, PAYE, modernisation project. The new real-time PAYE reporting system started on 1 January 2019. This significant reform of the PAYE system brings improved accuracy and transparency for Revenue, employers and employees. It reduces the administrative burden on employers and will ensure that employee tax deductions and contributions are correct and are reported to Revenue on time.
Finally, I would like to turn to how the proposed OTS would work. In that context I would like to make some comments on the detail of the proposed Bill. Our first issue centres on the exact context in which the proposed body will operate. The Bill suggests that the proposed OTS will be established but how exactly it would interact with the Department of Finance and Revenue is unclear. In addition, section 6(1) states that the proposed OTS must provide advice to the Minister on request. This may seem reasonable but the Bill adds that such advice must be provided "as the OTS considers appropriate". This raises the question of whether it should be open to the OTS to provide advice whether the Minister requests it or not. We do not have a definition of exactly what "simplification" could involve, beyond noting that it could include improving the efficiency of administration. It is open to interpretation and potential confusion as to the exact role of the proposed agency.
The Bill proposes that the OTS is to consist of not more than eight members, to include a chairperson, a tax director, a representative of the Revenue Commissioners and a representative of the Department of Finance. Additional members, if any, are to be nominated by the chair. The members of the OTS are to be appointed by the Minister for Finance and a person may be appointed as a tax director of the OTS only if the Minister for Finance is satisfied that he or she has the necessary qualifications and experience to direct the manner in which the OTS discharges its functions. The Minister for Finance would be required to consult the chair of the OTS before appointing a person as a tax director. As only two of the eight potential members are likely to be civil servants an additional salary cost may well be incurred, unless it is envisaged that the other members will be retained on a pro bono basis. This also seems like quite a large number of members when contrasted with Revenue, for instance, which only has three Revenue Commissioners including the Chairman.
Regarding staffing, the Bill states:
The OTS may appoint such and so many persons to be members of the staff of the OTS, and on such terms, as may be determined by the OTS with the prior consent of the Minister given following consultation with the Minister for Public Expenditure and Reform.
This administrative structure seems somewhat elaborate and could absorb scarce resources in pursuit of a potentially duplicated or even unnecessary goal. It therefore appears that quite significant costs would be incurred in setting up the proposed office and in the provision of any staff or facilities deemed necessary for it to function. To these could be added the costs that would presumably be incurred both by the Department of Finance and by Revenue in their engagement with the new body. There may also be implications for the Department of Employment Affairs and Social Protection, as section 3(2) states that the definition of taxes envisaged by the OTS would include insurance contributions. While Revenue acts as a collection agency for social insurance contributions, it should be noted that policy formulation and administrative arrangements in this area are the responsibility of the Minister for Employment Affairs and Social Protection. It is surprising that the proposed lifespan for the proposed OTS is specifically set at five years in section 6 of the Bill. Simplification is a process of continuous improvement and regular review rather than one lasting just for a specific period.
In conclusion, while I recognise that the intentions of the proposed Bill are laudable there are significant concerns. I have outlined some of the pertinent issues. We consider that there are better and more efficient and effective ways of dealing with the issues that the proposed office is intended to address.
I wish to thank the long list of speakers who contributed. One wonders about the complaints the Ceann Comhairle gets about Members being unable to get speaking time.
This is an important Bill. My colleague, Deputy John Lahart, spoke about the various areas where an office of tax simplification could be of assistance. I know of many elderly people who are often overwhelmed by the complexity that seems to be inherent in various State organisations, whether concerning social welfare, taxation or their local authorities. The Minister of State knows that from his work in his own constituency office. I know that and Deputy O'Reilly knows it too. This simply adds undue stress to their lives, which they could well do without. We only need to consider areas such as pensions, inheritance tax and probate to see this point.
An office of tax simplification can improve the experience for all users, including the self-employed worker, the stay at home carer, the pensioner, the PAYE worker, the SME owner and indeed the Revenue Commissioners themselves. This is something I have raised with Revenue on its numerous appearances before the Committee of Public Accounts. Everyone benefits from a simple and user-friendly tax system. A consistent and straightforward tax code is only part of the equation. The administration of tax is also a crucial element. This Bill will seek to simplify all this. An office of tax simplification will look at the entire tax system, including both the code and the administration.
As Deputy Lahart noted earlier, to support small businesses we have the knowledge development box, the key employee engagement programme, KEEP, the employment and investment incentive, EII, scheme and various other tax incentives. These schemes are not being taken up simply because the application processes are too complex. Complexity leads to added administrative expense. The greater the expense, the lower the take-up.
There is far too much complexity for individuals as well. I refer to inheritance tax. Let us suppose that a parent suddenly passes away and the family home is to be passed onto the child. At a time when an individual is already grieving and going through a very difficult time in his or her life, the inheritance tax system kicks in. There is a possible tax liability of €30,000 or €40,000 at a time of immense sadness. The system is complex for those who are not versed in tax law and are not party to the legislative debates that happen in this Chamber. It is intimidating. People are vulnerable and at the end of it all there could be a substantial tax bill, which adds yet more stress. It is in these areas that an office of tax simplification could play a vital role. It could look at all these areas objectively and provide recommendations to the Government, the Oireachtas and the public on how we can do better for our citizens. Nobody likes paying tax. By making the tax system simple for the taxpayer we would perhaps make the experience of paying tax less stressful.
The tax strategy group does great work each year. It plays an important role in policymaking. It brings various options on complex tax areas together and adds crucial insights in the various tax policy debates in every budget cycle. This Bill does not replace the tax strategy group but rather complements it. The tax strategy group is restricted in when it can bring issues forward. The office of tax simplification could report on any matter and would be able to look at every area of tax.
To conclude, a simple tax code benefits us all. Of course there is often a reason for complexity, such as to close off loopholes or to make sure reliefs are targeted at those who really need them.
However, I am convinced that there are areas that are overly burdensome and complex and that is where the Bill comes in. The Bill is not revolutionary. It is straightforward in its objective and it tackles a very specific issue. I appreciate the comments of Deputy O'Reilly and I hope that the entire House will get behind and support the Bill in order that we can obtain a simple, efficient and consistent tax code that is more competitive than is currently the case.