Muslim Community Lobby Ireland is an independent organization established 1st May 2007. Its motto is TO USE THE VOTE RIGHTLY AND TO RAISE THE MUSLIM COMMUNITY AWARNESS WITH THEIR RIGHTS AND TO PROMOTE TOLERANCE AND UNDERSTANDING OF OTHER EXISTING GROUPS. لترشيد استعمال الصوت الانتخابي ولتوعية وتعريف المسلمين بحقوقهم في ايرلندا وان يعيشوا بتفهم للواقع وللجماعات الاخرى الموجودة على الساحة
Wednesday, November 24, 2010
Response of Minister for Finance - Brian Lenihan, T.D.
I would like begin by thanking the many Deputies who have made considered and useful contributions to this debate on the Finance Bill 2010. I look forward to a constructive and informed discussion at Committee Stage.
In my reply, I will, as far as possible in the time available to me, address the points raised by the Deputies yesterday and today. There will, of course, be a further opportunity at Committee Stage to deal in greater detail with issues covered by the Bill.
The overall thrust of the Bill
Before moving on to address some of the points specifically relating to the provisions of the Bill itself, I would like to deal with some of the more general issues raised, particularly by Deputies Bruton and Burton. It was argued that the Bill did not contain a vision. Indeed Deputy O’Higgins felt that the Bill is unimaginative while Deputy Enright suggested that it is unambitious. I disagree.
This Bill contains significant measures which will enable Ireland to build on our existing strengths as an economy. These measures when taken together with our budgetary strategy, will protect existing jobs and create additional ones. They will support export-led growth in services and goods. This is the best, and the only, way of maintaining and enhancing our international competitiveness which I highlighted on 9th December as a key focus of Budget 2010. Unless we sharpen our competitive edge, we will be unable to return to the tried and tested strategy of export-led growth.
Some opposition Deputies described the Bill as a housekeeping exercise devoid of ideas to deal with the challenges facing us at present. I have to say that such a view contrasts sharply with the commentary from the industries and enterprises on which we will be relying to create well-paid jobs in this economy as we return to growth. It was suggested that the Bill lacks focus and places an unfair burden on taxpayers. This, after a budget that contained no personal tax increases and some reductions in consumption taxes! Let me say, it is the opposition which lacks focus or, more correctly, the ability to see or understand the ‘big’ picture.
Budget 2010 and this Finance Bill build on the work started in Budget 2009. Over the past 20 months, the Government has made significant progress in stabilising the public finances. The adjustments involved very hard decisions and I am well aware of their impact on citizens. But they were necessary to ensure the very financial survival of this country. Those decisive actions have enabled us to stabilise the deficit and have led to a reduction in the cost of borrowing by the State.
In the run up to the Budget, I made it clear that we could not tax our way out of our difficulties. I know the main opposition party agrees with me on this. Accordingly, the Budget focussed on expenditure and did not increase the burden of income tax. This approach also informed the development of the Finance Bill. Deputies will be aware that there are no tax increases in its provisions, apart from a number of measures aimed to ensure that high earners pay their fair share and I make no apology for including these measures.
In her contribution to the debate, Deputy Burton moved quite a distance from the subject to indulge in her usual rant about the banks and the builders. Loath though I am to follow her departure from the subject of this debate, I would like to deal with her accusations that I misled the House about the attitude of the IMF to NAMA. Deputy Burton was relying on a newspaper report of last Monday. I should point out that the note on which that report was based contains a ringing endorsement of NAMA by the IMF. In fact, let me quote: “the IMF would have been encouraging the adoption of a NAMA-type initiative even if the Minister for Finance had not already announced it”. It is quite clear from the note, which is now on my Department’s website that the IMF fully backed the Government’s policy on the banks and the establishment of NAMA.
I do not intend to replay the NAMA debate here this evening, but Deputies are aware that there was a very intensive debate about NAMA that culminated in the passage of legislation which allows guidelines to be issued by the Minister to the participating institutions to facilitate the flow of credit to SMEs. I would remind Deputy Burton that time and again during that debate, I said that we need to be clear that it is not in the interests of the banks or of this economy that the banks return to the excessive and imprudent lending of the past. That is the last thing we need. And it was in the context of a discussion about that very point that Mr. Seelig made his remarks about the impact of NAMA on the availability of credit.
We are all concerned about the availability of credit. That is why the credit guidelines were included in the NAMA legislation. But Deputies must also realise that it is not the intention of the guidelines to return to the over-heated, excessive, lending which occurred in recent years. What we want to ensure is that viable, sustainable, businesses and households can access lending. And, yes, that means we are going to have less bank lending than we have had in recent years.
The best way to ensure that credit starts flowing in the economy is through the creation of a healthy banking system. This is why NAMA was set-up to cleanse the banks’ balance sheets of toxic loans. It is the Government’s view that NAMA is the best way to restore stability in our financial sector which will enable banks make credit available in the economy. The IMF delegation agreed with this view and Deputy Kennedy made this point well yesterday.
Measures contained in the Bill
Mortgage Interest Relief
Moving on to measures contained in the Bill, I welcome the support given by Deputy Bruton, Deputy Kennedy and Minister of State Roche in relation to the extension of mortgage interest relief for those who bought at the peak of the housing market. The extension of mortgage interest relief will help those who purchased in 2004 or later, and the transitional measures may, as Deputy Kennedy highlighted, act as a stimulus to those who wish to enter the housing market at this stage. However, I would emphasise my commitment to remove this relief altogether by 2018 which will provide significant savings to the Exchequer.
I would like to take this opportunity to refer to comments made by both Deputy Crawford and Deputy Enright in relation to mortgage interest relief. Both Deputies seemed to suggest that mortgage interest relief is not available for individuals on low incomes. I must clarify for the Deputies that mortgage interest relief is a tax relief of up to 25% on interest. It is applied at source, thereby reducing the total mortgage payment. This relief is available to all qualifying loans regardless of the income of the mortgage holders.
Restriction of Reliefs
Deputy Burton referred to my Budget speech, where I indicated that high earners must pay their fair share. The amendments, announced in the Budget and set out in this Bill, to the restriction of reliefs measure, will severely curtail the amount of tax reliefs that can be used to reduce the income tax liability of those on high incomes. It will ensure that, in addition to PRSI and levies, those with high incomes and using reliefs will have an effective income tax rate of about 30%. This measure applies to a list of specified reliefs, including property based reliefs, the use of all of which has been curtailed as a result of this change. I thank Deputy Moynihan for his support on this and other taxation issues in his contribution.
Start ups and SMEs
Deputies Bruton, Burton and O’Donnell have all referred to the need for tax incentives for start-up companies.
Deputy Burton referred in particular to the need to help indigenous start-ups and I am providing in this Bill for an extension of the tax exemption for new start-up companies introduced in Budget 2009 to companies who commence to trade this year. I am aware of the recommendations of the Commission on Taxation in relation to this exemption. The Commission proposed that the exemption be extended to non-corporates, but that it should terminate in 2011. The current scheme, while still only available to corporates, continues to be available for three years. Therefore, new start-ups that commence trading in 2010 can continue to avail of the exemption up to and including 2012.
Deputy O’Donnell made reference also to the R&D tax credit scheme and proposed that the credit should be allowed to be offset against PRSI. This proposal is not new and I am aware of other proposals to allow companies set off the tax credit against their payroll tax liabilities. There are difficulties in acceding to these requests, not least the implications for the Social Insurance Fund into which PRSI contributions are paid and the fact that payroll taxes are paid by companies on behalf of their employees on a fiduciary basis.
The R&D tax credit scheme has been improved in most Budgets and Finance Acts since its introduction in 2004. I made very significant enhancements to the scheme in Budget 2009 and Finance (No 2) Act 2008, including an increase in the rate of the credit from 20% to 25% and, most notably, the introduction of a payable credit in circumstances, for example, where there is no Corporation Tax liability against which to offset the tax credit. These and other changes made to the scheme in recent years have made it one of the most competitive schemes of its kind around – something I would also point to in response to Deputy Burton’s assertion that Ireland’s only competitive advantage is its 12.5% tax rate. However, I would accept Deputy Kelly’s point that perhaps not all companies are as aware as they should be of its provisions.
I am conscious, of course, that there are reasons other than cash-flow reasons why certain companies and advisors wish to allow the tax credit to be set off against payroll costs. I believe, however, that it should be possible to devise an accounting solution which will deal with that the issues in this area.
The Financial Services Sector
I would agree with Deputy Burton that Ireland’s reputation, both from a financial regulatory perspective and from a tax policy perspective is the key to our future success. This Government has announced significant reform of the financial regulatory structures. Further significant progress will be made in 2010. For example, the legislation necessary to underpin the structural reform in the Central Bank is expected to be published in the first quarter of 2010. Ireland also fully supports the work of the OECD on transparency and effective exchange of information on tax matters. Recently, Ireland has signed 14 Tax Information Exchange Agreements with non-OECD jurisdictions and is playing a leading part in the OECD’s new Global Forum initiative on tax openness.
In relation to Islamic Finance, one of the measures in the Finance Bill designed to boost our offering in relation to international financial services, I would point out that Shari'a compliant finance is not only the fastest growing segment of international financial services but it is also perhaps the most 'ethical' form of international finance as it sets out strict rules regarding the nature and type of investments that may be made. I note also Minister of State Calleary’s support for this new growth area.
Capital loss issues
Deputy Burton mentioned also a front page article in The Sunday Business Post which alleged that a “Tax loophole cost exchequer €400 million in lost revenue”. Deputy Ardagh asked whether the figures quoted in the story were correct. The tax loss figure quoted in the story was, unfortunately, highly inaccurate. The amount of artificial capital losses claimed was €409 million – the amount of capital gains tax potentially under threat was in the region of €85 million. Furthermore, contrary to that newspaper report, I should point out that artificial losses are already being challenged by Revenue under the general anti-avoidance provisions contained in the section 811 of the Taxes Consolidation Act, 1997. But, given the aggressive nature of these avoidance schemes, it was felt necessary to specifically legislate against these schemes in order to protect Exchequer revenues.
Deputy Burton asked why I didn’t do something before now about this matter. But Deputy, I have. While the UK introduced a “broad based” approach to tackling such aggressive avoidance in their Finance Act 2007, we already had the general anti-avoidance section in the Taxes Consolidation Act. We then took measures in Finance (No. 2) Act 2008 to counter aggressive avoidance schemes which had come to light at that stage, involving the creation of artificial capital losses. I will continue to keep such schemes under review with a view to developing further measures to address them. Let me just say: I am surprised that a finance spokesperson of Deputy Burton’s competence did not go the trouble of checking the facts on this matter for herself rather than relying on a highly inaccurate newspaper report.
A number of Deputies referred to the carbon tax. The purpose of the carbon tax is to send a price signal which recognises the environmental cost associated with the consumption of fossil fuels. This price signal will stimulate innovation and increase awareness of energy efficiency. As I have previously indicated the only exemption from the carbon tax will be in relation to those companies within the EU Emission Trading Scheme (ETS) where a carbon pricing mechanism is already in place. I do not intend to offer exemptions for sectors outside the ETS. Once we start down that path, all sectors will make their own ‘special’ case and potentially we are left with a carbon tax that falls only on households. That would be unfair.
The impact of the carbon tax on agriculture has been mentioned by a number of Deputies, including Deputies Crawford, Breen, O’Mahony, Sherlock and Naughten. I appreciate the position many farmers currently find themselves in. However, I should point out that the excise on agricultural diesel is only around one-tenth of that applying to auto-diesel. That’s a significant concession. The new carbon charge has to be based on the emissions that arise from the fuel used. So to ignore such emissions would simply undermine the rationale for the tax in the first place. The current excise tax arrangements ensure agricultural diesel remains significantly cheaper than auto diesel.
Deputy Bruton pointed out that the application of carbon tax to coal and peat creates difficulties because of the potential for products with lower environmental standards to be sourced from the North. I agree with him and I can assure Deputy Bruton that I will not be introducing the tax on coal and peat until I am satisfied that this issue is addressed appropriately – that is why I have not signalled a specific date yet. I can inform the Deputy that work has already commenced on this matter within the Department of Environment, Heritage and Local Government.
Value-Added Tax on Local Authority Services
Deputy Bruton and Deputy Burton referred to local authority services being made subject to VAT. I understand the concerns arising here, but I would like to remind the deputies that this is a requirement arising out a ruling against Ireland by the European Court of Justice in July 2009. In order to comply with the Court’s ruling, it is necessary to amend the VAT Act to provide that public bodies, including local authorities, are made subject to VAT in general where they engage in activities that lead to a distortion of competition with private operators.
It should be noted that the services that will become subject to VAT (for example, waste collection, landfill, and recycling services) are already subject to VAT where provided by a private operator. The standard or the reduced VAT rates will apply as appropriate and the changes will apply from 1 July 2010. Education, health, water and passenger transport services will not become subject to VAT arising from the Judgment as they are otherwise exempted from VAT.
I should point out that business customers will not be affected by these changes as they can claim deduction for any VAT charged by a public body. The impact on private individuals, VAT exempt entities and other non-registered bodies, will depend on the degree to which the VAT is passed on by the public bodies, which in any event should be limited somewhat since public bodies providing the service will also have entitlement to deduct the VAT they incur on their inputs.
On a related issue, I would like to reassure Deputy O’Mahony that the abolition of tax relief on service charges, a measure recommended by the Commission on Taxation, is not happening this year, or even next, but will apply from 2012.
In relation to the Domicile Levy, Deputy Burton asked how many of the almost 6,000 ‘tax exiles’ will be affected by the Levy. She also suggests that the measure provides wide scope for the use of professional advisory services to mitigate its likely impact. As I have stated on previous occasions, I am informed by the Revenue Commissioners there is no register or list of so called ‘tax exiles’ and there is nothing in Irish tax law that makes reference to ‘tax exile’ status.
The taxation of individuals in the State is in line with that prevailing in most other OECD jurisdictions. Individuals who are not resident here for tax purposes pay tax here only on income arising in the State and on income derived from working here. For the 2007 tax year (the latest year for which figures are available), 7,228 non-resident individuals filed Irish tax returns in respect of their Irish-source income or income derived from working here. The total amount of tax paid by these persons was c. €43 million.
Many of the individuals that show on their tax return that they are non-resident in the State do not have an Irish address. Many of these non-residents are foreign nationals or have a foreign domicile; and many of the non-resident Irish citizens or Irish domiciliaries included in this figure may have become non-resident for reasons unrelated to taxation, but who may have retained Irish investments (such as rental property). Individuals leaving the State are not required to give reasons for leaving. In other words, it is not true to say that 6,000 individuals are tax exiles. Some non-residents have an Irish tax liability but it is simply not true to say that all or most of them are Irish domiciled individuals who have moved out of Ireland for tax reasons.
As set out in the Finance Bill, the domicile levy of €200,000 will be charged on an individual who is Irish-domiciled and an Irish citizen whose world-wide income exceeds €1m, whose Irish-located property is greater than €5m, and whose liability to Irish income tax is less than €200,000. As it is difficult to estimate the number of individuals who satisfy these criteria, it is not possible to predict the number of individuals who will be subject to the levy. It is not expected that there will be widespread avoidance of the levy as suggested by Deputy Burton and the measure will contain anti-avoidance provisions.
It will be clear to Deputies that difficult decisions in all areas of policy must continue to be taken. However, such decisions are necessary to as we continue to restore sustainability to our public finances and enhance international confidence in Ireland as a place to do business.
Finance Bill 2010, giving effect as it does to a range of progressive and targeted measures, is a vital part of this process.
I look forward to Committee Stage where we will have the opportunity for a more detailed discussion on the measures contained in the Bill.