Brian Hayes (Dublin South West, Fine Gael)

I congratulate Senator Burke on his election as Cathaoirleach of Seanad Éireann. As this is my first opportunity to come to the new Seanad, I congratulate my colleagues on all sides after what must have been the most gruelling and difficult election in western Europe, and wish them success over the course of the coming four or five years.

The purpose of the Finance (No. 2) Bill 2011 (Certified Money Bill) is to introduce the necessary changes to taxation legislation which give effect to measures announced on 10 May by the Minister for Finance as part of the jobs initiative. One of the key drivers behind this initiative is the need to underpin the labour market. We recognise that the employment content of export-led growth is relatively low, notwithstanding its major potential to contribute to our economic recovery. Accordingly, employment-rich sectors such as tourism are being targeted, additional activation measures are being introduced, and the balance of capital spending is now being tilted towards labour-intensive projects. The Government recognises that this initiative is not a complete solution but is yet another important step in addressing the problem of unemployment and in boosting confidence.

The economic outlook is still highly uncertain. Nonetheless, there is now a growing consensus among domestic analysts that our economy is moving on to a positive path. Improvements in our cost competitiveness are clearly paying dividends in the form of renewed export momentum and inward investment. We are trading our way out of recession. Our strengths include our young and well-educated work force, favourable demographics and our strong pro-enterprise, pro-business environment. The fundamental strengths of the Irish economy remain and will support growth in the medium term. Building on and developing these strengths is one of the principal drivers of the jobs initiative.

Unfortunately, it will be some time before the improvements in exports have more tangible effects on the ground. This is because domestic economic conditions remain weak, an inevitable consequence of the unwinding of the excesses built up during the boom. I do not need to remind Senators that the Irish economy has experienced an extremely sharp downturn in recent years. Gross domestic product, GDP, has contracted in each of the past three years and is now around 15% lower than it was at its peak in mid-2007. This reflects a substantial decline in construction activity and falling consumer spending. Therefore, there is a requirement to improve the job creation environment - a challenge this Government is meeting.

Improving labour cost competitiveness is a key instrument in creating that improved environment. That is why we are halving the rate of employer's PRSI until end-2013 on jobs that pay up to €356 per week. Reducing the costs to employers of taking on new employees is vital if we are to support job creation. This measure will complement the targeted VAT relief in the labour intensive tourism sector and help create more jobs in that sector of our economy.

This is not a measure to be covered only by the Finance (No. 2) Bill. The Minister for Social Protection, Deputy Joan Burton, is legislating for the reduction in employers' PRSI in the Social Welfare and Pensions Bill 2011. Equally, the Social Welfare and Pensions Bill may include, as a Committee Stage amendment, a measure for the abolition of the charge to employers' PRSI on share-based remuneration, with effect from 1 January 2011. The imposition of this charge on employers has the potential to negatively affect current employment levels and future investment decisions as it needlessly increases the costs of doing business in Ireland. Businesses operate under strict budgetary control and in the current economic climate increasing their costs is unwise.

As the Minister for Finance stated, when he announced the jobs initiative in Dáil Éireann, this country does not have the resources available at present to fund large-scale policy initiatives to help to generate economic activity. He also made it clear that any costs associated with the measures the Government is implementing as part of this initiative must be paid for. This will be achieved through the introduction of off-setting measures to ensure that the measures are budget-neutral over the period from now to 2014.

We recognise that this means the stimulatory effect on the economy of this package will be less than it would be in an ideal world but its importance is that it represents the first step by this Government towards improving the competitiveness of vital sectors of the economy and enhancing the functioning of our labour market. We will build on this initial step, with a view to developing this Government's vision of rebuilding a prosperous and productive economy as opposed to the one we were handed when the election was over.

This Finance (No. 2) Bill has been drafted specifically to give effect to those taxation-related measures which the Minister for Finance announced in the jobs initiative. These measures include the research and development tax credit; the suspension of the air travel tax; the introduction of a second lower rate of value-added tax; and the introduction of a pension levy.

Section 1 relates to the research and development tax credit.

Senators are aware that the corporation tax regime is a vital element of our industrial policy. I was glad to see my colleague, the Minister for Finance, Deputy Noonan, who was in the United States in recent days, making it abundantly clear to US investors and business world, and to the international community, that the 12.5% corporate tax rate has an absolute guaranteed position from this Government. That position enjoys cross-party support in this House and the other place. If we are to try to reboot the economy with confidence, it is absolutely crucial for us to uphold it. One should not tinker with, tamper with or alter such a key driver of Irish industrial policy. In effect, almost 250,000 jobs are at stake, directly or indirectly. The Minister for Finance, the Taoiseach, the Tánaiste and all other members of the Government have issued a clear message. Despite the attempts of a small group within the European Union to argue and lobby for a change in our position, we are remaining rock solid in that respect. The 12.5% rate will remain. It will not be altered. Despite the arguments advanced by a minority, there will be absolutely no change in that regard.

There are various methods by which companies can account for the research and development tax credit. For example, they can do so as a "below the line" reduction in corporation tax liability or as an "above the line" write-off against operating costs. As part of the jobs initiative, the Minister for Finance announced that he intended to amend the research and development tax credit legislation. Accordingly, this section amends the research and development tax credit provisions, primarily for the purpose of enhancing the flexibility for accounting purposes for the research and development tax credit on an "above the line" basis.

Ireland's attractiveness for research and development activities has played and continues to play a critical role in encouraging foreign direct investment and creating employment. The Government intends to continue to enhance that attractiveness. The purpose of the scheme which is open to companies of all sizes is to encourage research and development in this country and thereby improve the economy and increase employment. A credit of 25% of the incremental spend on research and development is available for this purpose. The scheme has been enhanced in most years since its introduction to improve its effectiveness. The latest change which is being made in this Bill represents a further such enhancement.

The fruits of the tax credit scheme are evident when one considers that of the 79 new investments secured by IDA Ireland from existing clients in 2010, 37 or almost 50% were in the area of research and development. The value of the investment in Ireland arising from these new research and development projects is approximately €500 million. It also involves a considerable number of jobs. There have been calls by some for more to be done in this space. The programme for Government contains proposals for further improvements to the research and development tax credit scheme, subject to the outcome of a cost benefit analysis.

Section 2 of the Bill relates to the air travel tax. It amends section 55 of the Finance (No. 2) Act 2008 to empower the Minister for Finance to appoint, by order, a day on or after which passenger departures would not be subject to the tax. As part of the effort to boost tourism, provision is being made for the air travel tax rate to be reduced to zero or suspended. The commencement of this measure is subject to agreement being reached with the airlines to bring in additional passenger numbers. My colleague, the Minister for Transport, Tourism and Sport, is holding discussions in that regard.

A review of the measure will be conducted before the end of 2012. If it is considered unsuccessful, the air travel tax will be reapplied. Consequently, the relevant legislative measures will remain in place to allow for them to be recommenced if so required. The cost of this measure, based on an implementation date of 1 July, will be €15 million in 2011, €90 million in 2012 and €105 million thereafter. The suspension of the air travel tax is just one of a number of approaches being taken as part of the jobs initiative to reboot and revitalise the country's tourism industry.

Section 3 amends the Value-Added Tax Consolidation Act 2010 to provide for a second reduced VAT rate of 9%, in respect of certain goods and services, for the period from 1 July 2011 to 31 December 2013. The rate will revert to 13.5% thereafter. It is estimated that this measure will cost €120 million this year and €350 million in a full year. As announced in the jobs initiative statement, the 9% rate will mainly apply to restaurant and catering services; hotel and holiday accommodation; admissions to cinemas, theatres, certain musical performances, museums and art gallery exhibitions; and a range of other things set out by the Minister. The purpose of this targeted VAT relief is to boost tourism and stimulate employment in the tourism sector. I am confident that it will give the industry a much needed shot in the arm. To ensure the sector is delivering, however, the effects of the changes will be assessed and the measure will be reviewed before the end of 2012 in the context of preparing budget 2013.

Much economic activity within the tourism industry is highly intensive in its use of labour. This is particularly true of hotels and restaurants, recreation and entertainment. However, tourism continued to decline last year, in terms of the number of trips and total earnings. It is undeniable that the industry is facing significantly challenging circumstances. If we can get things right, however, it will also face a major opportunity. If it recovers the ground lost in recent years, it can make a substantial contribution to our economic recovery and the creation of employment in all parts of the country.

Overall, our tourism product is strong. In addition to its natural attractions, Ireland has a wide range of high quality accommodation to suit all tastes and budgets. We offer a wide range of sports and recreational facilities and events. Culture, heritage, golf, angling, walking, cycling and equestrian pursuits are all easily accessible. In recent years holidaying in Ireland has become more affordable. These are some of the many advantages we must harness to improve visitor satisfaction and increase the number of people from overseas who choose Ireland as their holiday destination. While the provision of tourist facilities and amenities is important, the marketing of what Ireland has to offer as a holiday location is also crucial. We must emphasise that we have a stock of accommodation, entertainment and recreational facilities, many of which have been significantly enhanced by public investment in recent years. In addition, the capacity of our transport infrastructure has been greatly augmented recently.

The various tax reduction and additional expenditure measures announced as part of the jobs initiative will be funded by way of a temporary levy on funded pension schemes and personal pension plans. This levy which is provided for in section 4 will apply at a rate of 0.6% to the capital value of assets under management in pension schemes approved by the Revenue Commissioners under tax legislation. The schemes affected are retirement benefit schemes, retirement annuity contracts and personal retirement savings accounts other than those known as vested PRSAs. The levy will apply for a period of four years, commencing this year. It is intended to raise approximately €470 million in each of these years. The levy will not apply to pension funds established here that provide services and benefits solely for employers and members exercising their activities and employment outside the State. In other words, the levy will not apply to the extent that a scheme is intended to provide retirement benefits outside the State. In addition, it will not apply where the trustees of a scheme have passed a resolution to wind up the scheme and where the business in respect of which the scheme was established is insolvent. Provision is made to give pension scheme trustees or administrators the option of adjusting the benefits payable under a pension scheme, on foot of payment of the duty but with safeguards to ensure this is done in an equitable manner. The chargeable people for the levy are trustees of pension schemes and the insurers and administrators having the management of the assets of pension schemes.

Section 4 also makes consequential changes to certain provisions of the Taxes Consolidation Act 1997 relating to the approval conditions that apply to pension scheme providers located outside the State which seek to provide retirement benefits in the State. Under the existing legislation, such providers are required, unless they have a fiscal representative in the State, to enter into a contract with the Revenue Commissioners to the effect that all duties and obligations imposed by the pensions tax legislation will be discharged. These duties and obligations are now extended to include the levy. There was some speculation that the Government would proceed to raid investment funds or deposit accounts. The Government has no plans in that regard. The Government regards it as a top priority to safeguard the security of savings and would not wish to consider any step that would impact negatively upon confidence. Other savings or investment products have not benefited from the generous tax reliefs that pension savings have historically been granted and continue to receive. Deposit accounts and savings products have already been subjected to additional taxation in recent budgets via the increase in the rate of DIRT and exit taxes, neither of which impacted on pension funds.

The Minister is conscious of the concerns of the pensions industry about the impact of a levy in circumstances where the pensions sector, in common with other sectors in our economy and society, is finding the current economic and financial environment challenging. However, the imposition of the levy is for a relatively short period and its purpose is to improve that environment by providing the means to encourage job creation in areas of our economy most likely to deliver that employment quickly.

The levy is being confined to pension funds because the Government believes the alternatives for increases in taxation elsewhere at this time would be damaging to the economy. The Minister's officials have consulted the pensions industry and other interested stakeholders-----