Tuesday, 8 October 2019
Financial Resolution No. 6: Capital Gains Tax - Exit Tax
(1) THAT section 627 of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended, as respects disposals deemed to have been made (that is to say, deemed to have been made by virtue of subsection (2) of that section) on or after 9 October 2019—(a) in subsection (2)—(i) by inserting “or, in the case of paragraph (c), at the time specified in subsection (2A)” after “event concerned”, andand
(ii) by deleting “, being a company that is resident in a Member State (other than the State),” in paragraphs (a) and (b),
(b) by inserting the following after subsection (2):“(2A) Notwithstanding anything in subsection (2), as respects the event referred to in paragraph (c) of that subsection, the time immediately before the company referred to in that paragraph ceases to be resident in the State is to be taken as the time at which the company shall be deemed to have disposed of all its assets (other than assets excepted from that paragraph by subsection (6)) and to have immediately reacquired them at their market value.”.(2) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).
Financial Resolution No. 6 provides for two necessary amendments to the anti-tax avoidance directive, ATAD, exit tax regime for companies introduced last year in budget 2019, in line with our commitments under the directive. The exit tax provision imposes a charge to tax at the rate of 12.5% on unrealised gains arising where a company migrates its residence or transfers its assets offshore such that it leaves the charge to Irish tax.
The first amendment relates to a potential avoidance opportunity identified by Revenue whereby it could be argued that the exit tax charge arising on the migration of a company's residence could not be imposed by Ireland as the company is no longer resident in Ireland when the exit tax event occurs. This argument is clearly not within the spirit of the ATAD, but could be used to circumvent the charge to exit tax. The amendment puts beyond doubt the application of the exit tax charge in such cases.
The second amendment corrects a transposition error which was noted following enactment of the Finance Act 2018 and brings the provision fully in line with the provisions of the anti-tax avoidance directive. In order to provide certainty and to avoid creating a window of opportunity for avoidance transactions, these amendments will apply from budget night. These amendments will be placed on a permanent statutory footing in the forthcoming finance Bill.
Financial Resolution No. 7 provides for several amendments to the Irish real estate fund, IREF, regime. An Irish real estate fund is an investment undertaking other than undertakings for collective investment in transferable securities, UCITS, where 25% or more of the value of that undertaking is made up of an Irish real estate asset. The tax framework for IREFs was introduced in the Finance Act 2016 to address concerns that had been raised regarding the use of funds to avoid the responsibility to pay tax where Irish property is concerned.
The Minister for Finance has always maintained that further action would be taken where additional concerns were raised with regard to avoidance in this space. Following a review of the first IREF financial statements filed earlier this year, the Revenue Commissioners identified a number of aggressive structures being utilised by some IREFs to reduce distributable profits and thereby avoid payment of the withholding tax. Incidents were also noted where a partial redemption of IREF units was structured in such a way as to avoid the realisation of gains by the unit holder. In line with the Minister's commitment, the Government is, therefore, legislating to introduce a number of anti-avoidance measures to counteract these avoidance activities.
The amendments include the introduction of a debt to property cost limit and an income to interest ratio to combat excessive leveraging and related party interest expenses within IREFs and a provision to ensure that a partial redemption of IREF units results in a proportionate realisation of any accrued gains. The Minister has also confirmed that scrutiny of IREF returns and financial statements will continue and that if necessary further action will be taken in future to ensure the appropriate level of tax is paid by these funds.
Financial Resolution No. 8 provides for a number of amendments to the real estate investment trust, REIT, regime. The REIT framework was introduced in the Finance Act 2013. A REIT must be listed on the main market of an EU stock exchange and must be widely held. It is subject to limits on debt and interest to prevent excessive leveraging. The purpose of the REIT regime is to facilitate long-term, risk-diversified collective investment in rental property and the attraction of institutional investment capital to the Irish property market. A number of amendments are being introduced to the REIT framework to ensure the appropriate level of tax is being collected.
The provision corrects an unintended anomaly in legislation whereby a distribution comprised of the proceeds of a property disposal is not subject to dividend withholding tax. In addition, an existing provision whereby a deemed disposal and rebasing of property value occurs should a company cease to be a REIT is being limited to apply only where the REIT has been in operation for a minimum of 15 years. This is in line with the original policy intention of encouraging stable long-term investment in the rental property market.
These amendments are intended to ensure that an appropriate level of tax is paid on property gains by REITs. The REIT framework was introduced to promote stable long-term investment in rental property by removing a double layer of tax that would otherwise apply on collective investment. It is not intended to provide an exemption from tax on income or gains and the amendments introduced today will ensure that this objective is upheld.
Fianna Fáil will support these resolutions. Financial Resolution No. 6 relates to avoidance opportunities identified by the Revenue Commissioners with regard to the OECD base erosion and profit shifting report of October 2012. Agreement was reached at EU level to progress five separate anti-avoidance measures via the anti-tax avoidance directives agreed in 2016 and 2017. Ireland signed up to both programmes and we are happy to support the financial resolution.
Financial Resolutions Nos. 7 and 8 relate to Irish real estate funds. A total of 25% or more of these funds must comprise Irish assets. With regard to IREFs and REITs, tax is charged not on gains within the fund but on funds extracted. The amendments proposed in Financial Resolution No. 7 include the introduction of a debt to property cost limit and an income to interest rate ratio to combat excessive leveraging and related party interest expenses in IREFs and a provision to ensure a partial redemption of IREF units results in a proportionate realisation of any accrued gains.
The amendments being made in Financial Resolution No. 8 are to ensure that REITs pay appropriate levels of tax. These proposals will generate approximately €135 million per annum, which is very welcome. In recent years, we have all become very aware of cuckoo funds swooping in, outbidding private individuals and paying little or no tax. Heretofore, cuckoo funds have had a totally unfair competitive advantage over private citizens looking, in many instances, to acquire their first home. In 2007, the funds purchased approximately 600 properties. This increased fivefold in 2018, when they purchased 3,000 units. We are late in coming to the game and this is very much a reactionary measure. These funds have avoided a lot of tax in the past two years, at a time when private individuals were finding it so difficult to afford their first homes. These funds can readily access the best professional advice from accountants and legal experts in order to ensure that they pursue an aggressive tax strategy to avoid and reduce their tax liabilities.
While we support the two resolutions, it is important that this is kept under regular review and that it will be part of the tax strategy annual papers to ensure we keep pace with new potential tax avoidance mechanisms to ensure a level playing field. Heretofore, there was not a level playing field. Institutional investors were coming in and buying large-scale properties and not paying tax. They had an unfair competitive advantage over small Irish landlords. More importantly, they had an unfair competitive advantage over people trying to acquire their first homes. We support the resolutions.
Sinn Féin also supports Financial Resolutions Nos. 6 and 7. Financial Resolution No. 6, which is the exit tax amendment, includes a highly technical language change to be included in the exit tax stipulations. It is important that this is looked at in more detail in the finance Bill. Deputy Pearse Doherty certainly wants this to happen. There does appear to be a tightening to clarify exactly when the company's value as it relates to the exit tax is determined. In this measure, the time immediately before the company leaves the State is when the value for exit taxation purpose applies.
In the context of IREFs, we support any moves to clamp down on tax avoiding property investors. It seems this is a move to attempt to curb tax avoidance practices by IREFs. We have issues with how much IREFs pay and their effective rates of corporation tax and capital gains tax. Recently, Deputy Pearse Doherty tabled many parliamentary questions in this regard to the Minister for Finance. It is an area of concern to us. There also seem to be concerns regarding the shareholders being able to write down losses. We have a number of concerns with regard to IREFs. We support this particular measure and anything that would clampdown on tax avoidance by any property investor will receive support of Sinn Féin. We will support Financial Resolutions Nos. 6 and 7.
I thank the Deputies for their contributions. I want to come back on a number of points relating to Financial Resolutions Nos. 7 and 8 and some changes to section 110 in the forthcoming finance Bill. We estimate that in the region of €80 million will accrue from the changes we are making in these resolutions in terms of the changes to the taxation regime and trying to go after people aggressively avoiding tax. It is important that we support long-term investment in rental properties. In making these changes, we are trying to prevent people from aggressively avoiding tax but we are also trying to ensure that those investing here pay their fair share of tax while making a long-term investment in the property market. If we look at the residential property market and the increase in apartments coming off the back of these new investments, there was a 42% increase in the number of apartments built in the first six months of this year and planning permissions increased by more than 80% in the same period. It is producing supply but I agree that we must continue to monitor the situation.
We are not late to the game on this. We set up the IREF structure in 2016 because of the aggressive tax practices being pursued through other fund structures. We set up REITs on purpose to get more investment into property in order to ensure that we could get more homes built. After the financial collapse, the funding structure for property and investment changed and we needed to adapt to the new models that were out there.
Regarding being late to the game, the first accounts for these companies were only filed at the beginning of this year. This is our first opportunity to move and we have moved very quickly, based on consultation with Revenue and others to ensure we can close down these aggressive tax practices. We are doing that quite quickly.
There are approximately 210,000 apartments nationally of which 1.4% are controlled by REITs. While they control some, it is a very small percentage at present. We know there is now more activity and that is why it is important that we continue to monitor it. I have given that commitment as Minister for Housing, Planning and Local Government. We have also introduced these new structures under rent controls, which were not there originally. We did that earlier this year. There is now more money for the RTB to enforce reflections of rent-pressure zones to ensure they are working, but also to keep it under review from the point of view of the Minister for Finance. It is important that we continue to do that. Those commitments have been made by the Minister.