Finance Bill 2005Minister for Finance Second Stage SpeechI move that the Bill be read a second time.
I am pleased to present my first Finance Bill to the House. I will listen carefully to the contributions to be made by colleagues and I will seek to respond to all of these in my later reply.
The Finance Bill is one of the major pieces of Government legislation each year. It allows the House to express its views on economic, fiscal, tax and expenditure policies. It allows tax proposals to be teased out and for the Deputies in a democratic way to set out for the voters what policies they would wish to pursue.
I am all for such debate. I hope to enhance this process by reforming the way we do things for the Budget as I set out in my Budget day speech. I hope to present proposals to the Dáil on that before too long, once the Government has decided.
It is usual in the Second Stage speech to set out the rationale for the measures in the Bill together with a brief description of what the provisions in the Bill mean in ordinary language.
Purpose of Bill
In summary, there are a number of important focal points in the Bill. The Bill, when passed will:-
· Remove all those on the current minimum wage from the tax net, thereby delivering on a core commitment of this Government,
· Confirm the cut in stamp duty for first time buyers of second hand residential property to help new buyers onto the property ladder,
· Give effect to the other tax reliefs and tax reductions announced in the Budget, and
· Give greater powers to Revenue in pursuing major tax evaders. This will include strengthening the “aiding and abetting” offence in the list of Revenue offences in Section 1078 of the Taxes Consolidation Act in order to help the Revenue Commissioners take proceedings against those people who actively assist others evading tax, and
· Implement a number of recommendations in last year’s report by the Revenue Powers Group.
But that is not all. The Bill will:-
· Update tax law to cater for new international accounting standards applicable to companies, thus keeping up our competitive edge,
· Amend or extend a number of tax reliefs in several important areas, such as, pensions, foster care, share options, farming and IFSC activities,
· Upgrade tax administration to the benefit of taxpayers, especially in the PAYE area, and thus address the overpayment issue raised recently in the House,
· Finally, the Bill will close off a series of tax avoidance schemes some of which are quite aggressive in sheltering the income of some high earners.
In my approach I have tried to strike a balance between fighting tax evasion and avoidance on the one hand and ensuring that the tax system recognises the needs and concerns of compliant taxpayers on the other. I am also trying to see to it that the tax system plays a positive role in supporting economic development. This does not prejudge or take away from the major review of tax reliefs underway this year for Budget 2006.
Revenue Powers Group
As I mentioned already, the Bill will implement several recommendations of the Revenue Powers Group which reported last February.
Those recommendations of the Group not implemented in this year’s Bill remain under active consideration by me. I will look at these together with the Report of the Law Reform Commission on the operation of the revenue process which was published this week.
Economic Background to the Bill
It is important to remember the economic background against which this Bill is being presented. Figures out last week confirm that we have one of the lowest rates of unemployment in the EU. I have no doubt that inflation figures due out this week will confirm the low rate of inflation we achieved last year. We have one of the healthiest fiscal positions in the EU with a low debt ratio to GDP, a balanced budget, and substantial savings being put aside to meet future pension needs.
Twenty years ago, when I was first elected to this House, it would have been far-fetched, to say the least, to imagine any Irish Finance Minister being able to stand on such a record.
Prospects for economic growth in 2005 remain undimmed. The Central Bank confirmed that, in its recent Winter Review, forecasting growth figures of 5% for 2005, virtually the same as those made by my Department in the Budget. Of course our situation also contains risks, including the
The European Commission has also confirmed our good efforts and prospective growth potential. Indeed, in its commentary on
It also commends our solid progress in adhering to spending targets, advancing structural reform and of the relatively favourable position we have with regard to the long term sustainability of our public finances, despite an ageing population.
We have built something good here. And by “we” I acknowledge the role of all Governments. What is essential is to keep what we have built on, retain our competitiveness, invest in our infrastructure and maintain sound public finances.
We must also ensure that resources are fairly distributed. We took important steps in that regard in the Budget, which the ESRI described in its poverty proofing analysis as “progressively structured with the greatest gains for those with least income”.
We are increasing public spending in 2005 by 9% - three times the average for the EU, because of our higher growth rates. We are spending almost €45 billion, most of it in key social areas of health, education and social welfare. However, I agree with some here that what Government needs to continue to do, and what the House itself could usefully do in scrutinising Departmental spending, is to increase the focus on what Departments are expected to deliver with the total monies entrusted to them.
I hope to get away from a fixation on incremental spending as being regarded as the sole indicator of commitment to improvement of services. A better approach is to examine overall spending in terms of what such spending can or cannot deliver and so concentrate on getting better value for money.
We can best summarise our position from an economic point of view as one where we are doing well by reference to our competitors but where there are risks to the scenario, including risks from international exchange rate developments and oil prices. These are risks that are not under our immediate control and which we have to be able to adapt to.
Turning now to the provisions in the Bill, Sections 2 to 6 of the Bill implement the various income tax reductions and reliefs announced in the Budget. These widen the tax bands, reduce average tax rates and remove the current minimum wage from the tax net.
Sections 7 and 8 are relieving provisions in relation to BIK. Section 8 adds commuter ferries in the State to the list of passenger services for which employer provided travel passes are exempt from BIK.
Section 9 exempts foster care payments from tax and section 10 incorporates into law the long-standing exemption from tax of foreign service allowances.
Sections 11 to 18 deal with various aspects of income tax – share options, ESOTs, tax paid by company directors, chargeable persons under self assessment, taxation of lump sums and the tax on certain deposit interest. Some of these tighten up requirements in certain areas; others reduce the tax imposition on the taxpayer in particular cases.
Section 19 brings our pension tax rules into line with EU law by removing any possible discrimination between pension providers in the State and pension institutions from another Member State.
Sections 20 to 24 deal with putting the PAYE system on-line to enhance the level of service for the taxpayers in question.
This is a major up-grade of the tax administration system by extending the Revenue On-line System (ROS) to PAYE taxpayers. This will enable the PAYE sector to file returns and to electronically avail of a range of self-service options in relation to their tax affairs, including requests for reviews of tax paid. It will also provide for self-service options via an automated telephone system in relation to ordering forms and leaflets and claiming certain tax credits.
Income Tax Reliefs
Chapter 4 of this Part of the Bill deals with income tax, corporation tax and capital gains tax reliefs. Sections 25 and 34 deal with BES and film relief respectively and formally incorporate into statute law a number of changes required by the European Commission when granting State aid approval to these schemes last year. Section 26 amends the tax relief terms for heritage buildings and gardens by strengthening the requirement for reasonable public access and the effective advertising of public opening hours.
Sections 27 to 30 extend the farm relief for pollution control, provide for tax relief for farm re-stocking and provide for income-averaging for tax purposes of certain Feoga scheme payments made in 2005.
Section 31 allows a number of late applications for capital allowances in respect of third level educational buildings to be examined for the purposes of this tax relief on the basis that the applications were received before 31 December 2004. Section 32 clarifies and extends the definition of hotels for the purpose of capital allowances.
Section 35 is an important anti-avoidance measure to ensure that foreign based limited partnerships cannot be used by certain high-earners to reduce their income tax bills to nil. Section 36 is also an anti-avoidance measure to combat the re-packaging of distributions of income as capital gains so as to attract the lower CGT rate of 20%, instead of the top marginal income tax rate of 42%.
Section 38 is another anti-avoidance provision to ensure that life assurance companies cannot avoid the exit tax on gains made by investors by simply rolling these gains over into further investment products.
Section 39 also closes a loophole on the use of losses on offshore funds. Section 41 ensures that the ring-fence on the use of taxable losses in leasing contracts is not circumvented in certain cases.
Not all measures in this Part of the Bill are anti-avoidance.
Section 40 provides for the tax treatment of a proposed new type of investment vehicle – a Common Contractual Fund (CCF), a measure which will facilitate our funds industry. The new scheme will be subject to certain conditions and safeguards of the Revenue Commissioners, in order to ensure it is adequately supervised.
Section 42 amends the rules on the application of encashment tax on certain foreign dividend and interest cheques, cleared by retail banks in the State. Section 43 exempts certain non taxable entities, such as PRSAs and tax exempt unit trusts, from the application of dividend withholding tax (DWT). This will avoid the need for those bodies to reclaim the tax from the Revenue Commissioners in respect of dividends paid by Irish companies. This will eliminate an unnecessary circular flow of cash
New Accounting Rules
Section 44 in chapter 5 of Part I makes some important changes in tax law to accommodate the move by companies in 2005 to the new International Financial Reporting Standards.
Company law requires that from 1 January 2005 all companies listed on a stock exchange must prepare their consolidated (or group) financial statements in accordance with International Financial Reporting Standards (IFRS) instead of, in our case, Irish Generally Accepted Accounting Practice (GAPP). The individual accounts of companies may also be prepared in accordance with IFRS. However, once a company moves to IFRS, it will be required to use it as the norm for the future.
Under Irish tax law the starting point for calculating taxable trading income of a company is the profit of the company according to its accounts. Section 44 provides that where a company prepares its individual company accounts on the basis of IFRS such accounts will be used as the starting point for calculation of taxable trading profits.
This section goes into some detail on the rules to be applied on the specific tax treatment in a number of areas such as unrealised financial gains and losses, share-based payments, bad debt provisions, R&D, interest and labour costs included in capital assets and transitional rules for the switch from Irish GAAP to IFRS. This section is suitable for Committee Stage examination. The changes, while technical, are important in determining the tax liability of individual and groups of companies.
Section 45 provides for deductibility for interest paid by a company on loans taken out with lenders in other EU member states. Sections 46 and 47 apply the benefit of certain EU Directives on taxation of interest, dividends and royalties to
Section 49 amends the taxation regime introduced last year for Headquarters and Holding Companies in
Sections 51 to 53 relate to capital gains tax and deal with the 15% CGT withholding tax by the purchaser of certain assets valued over €500,000 and provide for exemptions from CGT for the new Health Services Executive and trustees of tax exempt pension schemes.
These are the main direct tax changes in the Bill.
I will now move on to excise and VAT, where, as the House knows, the Government made no changes to rates on Budget night. Consequently the provisions in this Bill deal more generally with excise and VAT law and with measures to counter evasion and avoidance in these areas.
Sections 54 to 58 deal with alcohol products tax and the investigation and pursuit of offences. Most notably, Section 57 allows a court to temporarily close a premises or club involved in selling illicit alcohol. The previous penalty of full closure was not being applied as courts seem to feel it too draconian. Section 58 provides for the 50% excise reduction on microbreweries announced in the Budget which has been widely welcomed.
Sections 59 to 65 relate to petrol, diesel, LPG, fuel oil and coal. Section 59 provides for minimal increases in excises duty on LPG and fuel oil arising from an EU energy tax directive adopted in 2003. It also provides for new differentiated rates on low sulphur petrol and diesel. It provides for an EU energy tax on coal but as most types of coal usage, including domestic use, are exempted, the effect of this change is minimal. These provisions will come into effect by Commencement Order.
Section 66 to 81 consolidate and modernise the excise law on tobacco products which is contained mainly in a 1977 Act of the Oireachtas. The provisions do not introduce any new duties or any other significant changes into the operation of tobacco tax law.
Sections 82 to 92 relate to other aspects of the excise system. The provisions are mainly of a technical nature. Section 92 extends the 50% VRT rate reduction on hybrid vehicles to 31 December 2006. This relief had been due to end on 31 December 2004 but there are particular environmental reasons connected with lowering emissions why we should continue to encourage the wider use of hybrid petrol/electric engines in more vehicles.
Sections 93 to 108 contain a number of important revisions to the VAT tax code. These deal with several anti-avoidance measures relating to VAT on leases in section 95, VAT on money transfer services in section 96 and VAT on the sale of developed property in section 95.
I think it’s fair to say that, as we have become more vigilant in closing off loopholes in direct tax areas, attention has switched to finding ways of saving tax through creative interpretations of VAT law. VAT now brings in €11 billion, or 30% of tax revenue each year. Consequently the gains and losses from tax planning can be significant.
VAT law is often complex. It is open to interpretation. The European Court of Justice sometimes rules in an unexpected way. There are legitimate issues of difference in how Revenue and tax advisors feel that some of the law applies. That’s fair enough in so far as it goes. But it is also important for the State to protect the revenue base.
For that reason, the VAT changes here focus on clarifying the law, sometimes in favour of the State and other times in favour of the taxpayer, as in the case of the exemption from VAT of student accommodation. We can go further into the subject of VAT on Committee Stage, if desired.
Stamp Duty and CAT
Sections 109 to 121 refer to stamp duty. Section 110 deals with particulars which must be notified to Revenue concerning the liability of an instrument to stamp duty and the penalties for failure to notify. Section 111 combats the avoidance of duty by splitting transfers of property into more than one conveyance.
Sections 113 and 114 deal with the stamp duty exemption on land acquired by young trained farmers and requires that if any of the land is disposed of within 5 years, a proportionate clawback of the stamp duty will apply where the proceeds are not fully reinvested.
Section 115 sets out the provisions that will apply to the measure announced in the Budget whereby stamp duty will not be charged on an exchange of farm land between two farmers for the purpose of consolidating each farmer’s holding.
Sections 116 and 117 extend the stamp duty relief on certain stock borrowing and repurchase transactions to assist liquidity on stock exchanges.
Section 118 confirms the stamp duty reduction for first time purchasers of second hand residential property. I am confident that this measure, which came into effect on Budget day, will continue to free up the market to the benefit of first time purchasers. That was the intention.
Section 119 reduces companies capital duty on the issuing of share capital from 1% to ½% for transactions after budget day, 2nd December last. This will help maintain our position as an attractive location for companies.
Section 120 exempts credit cards and ATM cards from double stamp duty where these cards are being switched from one provider to another. This change will help competition in the market and ultimately lead to keener credit card rates of interest.
These last three measures were announced on Budget day.
Section 123 amends the information to be included in the affidavit required for revenue purposes in respect of the estate of a deceased person. (The amendment reflects the changes made in the Finance Act 2000 in regard to residence as the basis for capital acquisitions tax instead of domicile as it was up to then.)
At present a person can provide for inheritance tax liabilities by insuring against them and the proceeds of such policies (called section 60 policies) are themselves free of tax where they are used to pay the CAT liability. Section 125 extends this relief to situations where such a policy is taken out to meet the tax liability that may arise on the inheritance of an Approved Retirement Fund by a child aged 21 or over.
Sections 126 and 127 deal with inheritance tax relief on agricultural and business assets where the farm or business is sold within the time limits set out in the legislation.
(The sections clarify that any relief granted will be clawed-back in proportion to the land or business sold and not re-invested in farm or business property. The purpose of these reliefs was to encourage the retention of family farms and businesses and the changes proposed are in line with that rationale.)
Finally, Section 128 under CAT grants a credit for foreign tax similar to estate duty, gift or inheritance tax against Irish gift or inheritance tax where a double taxation treaty does not exist between us and the country concerned. (This means everywhere except the
The final part of any Finance Bill is often the one that attracts most attention as it deals with the actual collection of tax and the powers of the Revenue to enforce the State’s valid claim on the taxpayer. This is also the case this year, it seems.
Section 129 and 130, however, limit Revenue’s powers in relation to PAYE and relevant contracts tax on payments to sub-contractors by requiring that Revenue cannot enter a private dwelling to inspect books and records in connection with these taxes unless they have either the consent of the occupier or a court warrant. This is the position already under the law on other taxes and the Revenue Powers Group last year recommended that this safeguard be extended to PAYE and RCT. I am happy to propose to do so to the House.
Section 131 is new and empowers the Revenue Commissioners to sample the information, other than medical records, held by a life assurance company in respect of a class or classes of policies and their policyholders. This new power, which is modelled, in part, on powers given to the Revenue Commissioner in relation to DIRT in the Finance Act, 1999, will enable Revenue to investigate whether certain life assurance products are or have been used to shelter untaxed income.
Section 132 reduces the maximum penalty in the case of fraud from 200% of the tax undercharge to 100% which is the normal limit used by Revenue in such cases. This reduction, which was recommended by the Revenue Powers Group, affects undercharges of tax after the passing of the Bill. Historical cases are not affected.
Section 133 introduces a new offence of facilitating tax and duty evasion which will be more capable of prosecution than the current offence of aiding and abetting. The section also provides, as modern corporate enforcement law does, that where an offence is shown to be attributable to any neglect on the part of those persons directing the affairs of the body corporate, or acting in positions of authority, such persons may be proceeded against as well as the company itself. These changes apply to offences going forward. By virtue of the Constitution, they cannot be made to apply to what happened in the past.
Since the Bill was published I have noted the concerns of representatives of tax practitioners that individuals might find themselves falsely accused of facilitating tax evasion. I consider this to be highly unlikely. Deputies will know that the Revenue Commissioners are very careful when selecting cases for prosecution and this will continue to be the case.
The Revenue Commissioners can be expected to use these provisions to target serious offenders and this intention will be reflected in the guidance given to Revenue Officers.
I would stress that for someone to be liable for a criminal conviction the prosecuting authorities would need to prove beyond reasonable doubt that the accused was concerned in or was reckless about the facilitation of tax evasion. These are not passive offences but would, typically, involve concealment, falsification or other dishonesty.
Recklessness is more than the making of a mistake. It involves serious misconduct or failure. I will listen to the views of Deputies and any representations I receive. But we must ensure we properly address the issue of tax evasion.
Section 134 proposes to increase the threshold for publication of certain settlements in the list of tax defaulters from €12,700, the euro equivalent of £10,000, set in 1983, to €30,000 and to provide for the indexation of this amount every five years by reference to the Consumer Price Index.
Both the Revenue Powers Group and the Law Reform Commission recommended an increase in the current €12,700 threshold for the publication of the list of tax defaulters. The current threshold was set in 1983 at £10,000 and has not changed since. The Revenue Powers Group recommended a threshold of €50,000 and the Law Reform Commission suggested €25,000, both indexable for the future.
The Government have decided to accept the case for an increase and €30,000 seems a reasonable level. This new threshold will apply only to tax liabilities incurred on or after 1 January 2005. It will not apply to any tax due before 2005 even if the settlement or adjudication is made on or after 1 January 2005.
Section 135 makes a number of changes to the legislation that was introduced last year to implement the EU Savings Directive. Amongst other things, it is amended to take account of the decision by ECOFIN to change the date of application of the Directive from 1 January 2005 to 1 July 2005.
Section 136 proposes to reduce the rate of interest on certain overdue tax from 1 April 2005 from approximately 11.75% per annum to just under 10% per annum. The reduction in the interest rate will not apply to PAYE, Relevant Contracts Tax, Professional Services Withholding Tax, DIRT, other withholding or exit taxes or to VAT or excise. The reduction will apply basically to one’s own overdue tax for which one is personally liable and not to fiduciary taxes being collected from others on the State’s behalf.
The remaining sections in the Bill, Sections 137 to 140 are standard or minor and technical amendments.
I hope that the House has benefited from this elaboration of the measures in the Bill. There are still some matters under consideration that I may be able to bring forward at Committee Stage should they receive Cabinet approval. At this stage they remain part of the deliberative process.
Should I have such amendments to bring forward I will of course seek to notify the Opposition Spokespersons in advance of the Committee Stage. I will, of course, also give consideration to any constructive suggestions put forward during our debate today and tomorrow.
I commend the Bill to the House and look forward to a constructive debate on it.
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