Finance Bill 2011
Minister’s Reply Speech
Second Stage Debate
Seanad Éireann on 28th January 2011
I thank the Senators for their comments and I will try to address each of them as best I can once I make a few general opening comments.
We have had an interesting and informative debate here today. And may I say also that we are facing into an interesting time. As many Senators have observed, this has been an unusual Finance Bill, both in terms of its timescale and in terms of the circumstances in which it has been developed. But I think it is a Bill which I can bring forward with a certain degree of optimism. I am pleased to say that, following the sharp contractions during 2008 and 2009, available data points towards a stabilisation of economic activity last year. Indeed, recently published figures show both GDP and GNP expanding in the third quarter of 2010, which is very encouraging.
It is encouraging that our recovery is being driven by the exporting sectors, underpinned by the significant improvements in competitiveness that have taken place. As wages and other costs are adjusting, we are pricing ourselves back into global markets. You will recall that I cited our 13% annual rate of export growth recorded in the third quarter of last year, one of the best performances in the EU. With this export-led growth, Ireland will have a balance of payments surplus this year, so the country as a whole will be paying its way. I believe that it is fair to stress, as I did in my Second Stage address to you, that Ireland remains open for business and is still the destination of choice for many of the world’s leading firms.
Before I respond to the comments from individual Senators, it is perhaps appropriate to revisit some of the key points in the Bill. In particular I would stress the importance of the following measures, many of which have been highlighted in our Debate here today:
- The Universal Social Charge represents a very substantial change to our tax system. It is based on the principle that everybody must pay according to their means. As I have said many times, it is simply not sustainable that 45% of income earners should pay no tax and I stand by that statement. But I accept that those who have medical cards have been adversely affected by the new charge and the Government has ameliorated their position while at the same time maintaining the principle that everyone must make a contribution. The cost of this change is made up by increasing the Universal Social Charge rate paid by self-employed taxpayers from 7% to 10% on income in excess of €100,000. It is important to re-emphasise that any changes to the tax provisions of this Bill must be paid for by increases elsewhere.
- Senators will recall the recommendations of the Commission on Taxation. Following on from Finance Act 2010, we have decided to restrict or abolish more reliefs. These include Rent Relief (phased out over 8 years), Patent Royalty Exemption, tax relief for trade union subscriptions, relief from BIK for employer-provided childcare facilities, capital expenditure on new machinery and plant for use in mining, and a number of share-related measures: relief on loans to acquire an interest in certain companies, Approved Share Options Scheme and relief for new shares purchased by employees.
- An important measure to support business is the enhancement of the Business Expansion Scheme (BES), which is being reformed and renamed as the Employment and Investment Incentive (EII). This new incentive will be more targeted at job retention and creation. Once the necessary approval is received from the European Commission, the new incentive will be commenced by Ministerial Order. This incentive will encourage job creation in both new and existing companies.
- A further measure to support business extends the scheme introduced in Budget 2009 which provides a three-year exemption from corporation tax on the trading income and certain gains of new start-up companies. This is being extended to include start-up companies which commence a new trade in 2011.
- In a measure which will benefit of the house purchaser, and indeed the residential property market, the Bill gives effect to the fundamental reforms to Stamp Duty on residential property as announced by me in the Budget. Stamp Duty is now payable at 1% on residential property transactions valued up to €1 million and 2% on the excess over €1 million.
There are other measures in the Bill which are perhaps equally worthy of being highlighted but I would now like to turn to the points raised here today by the Senators and to address these:
Senator Twomey suggested that I didn’t know what the yield would be from the higher USC charge on income in excess of €100,000 arising from self-employment. This is simply not the case. I have said that this charge would raise €80 million in 2011. I have further elaborated that this charge would pay for the reduction of the USC for medical card holders which is expected to cost approximately €80 million in 2011.
Senator Twomey will also be aware that this Bill provides that the new student contribution that replaces the student services charge will be allowed for tax relief in respect of second and subsequent children that attend college simultaneously. This was not the case with the old student services charge which was not eligible for tax relief at all. While it’s not my area I would note also that the Student Support Bill, which completed all stages in the Seanad earlier this week, provides for a significant streamlining of the Student Support Grants System. It provides for the amalgamation of the existing 4 different grant schemes into a single statutory scheme, and it gives the authority to the Minister for Education & Skills to designate a single awarding authority for the new scheme compared with the present situation where there are 66 awarding bodies (the VECs and the local authorities). I would hope this might address some of the concerns raised by Senator Norris.
I would like to thank Senator Hanafin for his support and in particular for his elaboration on the reasons for our approach to the public finances and to resolving the problems of the banking sector. I thank the Senator also for his remarks about the changes to Stamp Duty on residential property. As he indicated, the reduction in the rates is intended to stimulate the residential property market. The Senator recognises that the Universal Social Charge is a progressive tax and that it improves our current taxation system. It is more sustainable than the Income and Health Levies which it replaces and removes many of the anomalies and steps intrinsic to those charges.
Senator O’Reilly and Senator Hannigan voiced concerns in relation to the USC. In response to the suggestion that the entry point to the USC is too low, I must advise that when investigating the USC I found that I could not provide a zero rate at the bottom at this would be available to all income earners regardless of income. My only other option was to introduce an exemption threshold. This is a step. My experience is that steps higher up the income ranges cause anomalies and poverty traps. People can actually lose in net pay terms from an increase in gross pay. One of the objects of introducing the USC was to remove this type of anomaly which was a feature of the old system of Income Levy and Health Levy. You cannot widen the tax base without bringing people into the tax net. It is also true that you cannot bring people into the tax net without charging them some tax. And finally, if any income earner goes from a position of paying no tax to a position of paying some tax, no matter how small, they will feel an impact on their net income. It is unfortunate that income earners are feeling an adjustment but I must reiterate my belief that everyone should contribute something, no matter how small.
Senator Ross could note that, in spite of the shortened timeframe for the Finance Bill, I have introduced specific amendments to improve the competitiveness of the international financial services industry. The Bill extends the type of assets that a section 110 company can acquire, to include plant and machinery, commodities and carbon offsets. The extension to include plant and machinery will be of benefit to Ireland’s international leasing industry, in particular the aircraft leasing industry. The inclusion of commodities will facilitate the use of Irish securitisation companies in Islamic finance transactions and the inclusion of carbon offsets is part of a broader initiative to develop a Green Financial Services Centre. I would also thank Senator Mooney for his support in relation to the IFSC initiatives.
In relation to Senator Ross’, Senator Donohoe’s and Senator Norris’ point in respect of the bondholders, as I said in my Dáil response I have provided for burden-sharing with holders of subordinated liabilities in institutions in the Credit Institutions (Stabilisation) Act 2010. However, as we have discussed on numerous occasions in the other House, senior bond holders rank equally with depositors in having claims on Irish banks.
To Senator Ross I would add that, in the context of discussions with the IMF and EU, it was clear that “burning” of such bondholders at present was not an option which supported by these authorities. In the current circumstances there is no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the European Central Bank.
The Senator suggested also that the 12.5% rate of corporation tax be reduced to below 10%. Members of this House and of the Dáil point to numerous measures they feel are not working in this economy and society and which they argue, in some cases correctly, should be fixed. Senator Ross takes issue with perhaps the single most successful policy tool at our disposal. A policy tool that has worked and continues to work. While trading companies, whether foreign or indigenous, would not complain if the corporation tax rate were further reduced, there have been no widespread calls for this. The focus of industry, in common with that of Government, has been on protecting and maintaining our low rate of tax in the face of very significant negative sentiment internationally. Aside from costing over €700m in tax revenue which we can ill afford at this time, a reduction of 2.5% in the corporation tax rate would leave that task immeasurably more difficult.
As regards the point raised by Senator Alex White in relation to external determination of policy, I would disagree. But I would note, of course, that the provision of financial assistance by the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) - to any member state - would be on the basis of strong policy conditionality and based on terms and conditions similar to the International Monetary Fund (IMF).
I welcome Senator Boyle’s comments in respect of the removal of tax reliefs and implementation of the recommendations of the Commission on Taxation.
A number of Senators, including Senators Boyle, Ormonde and O’Malley alluded to the taxation aspects of Civil Partnership. I would like to update the House on the current situation. The legislation to make provision in the Tax Acts for the requirements of the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 has been largely drafted. It is unfortunate that because the unusually truncated Bill process, this legislation was not complete in time to be part of this Finance Bill. However, I am assured that the legislation can be dealt with by the new Government in a Finance No. 2 Bill before April and all taxation aspect will be made applicable from 1 January 2011.
I would like also to echo the point made by a number of Senators, particularly Senator Harris, on the need for a high quality of debate and how it is so often to be found here in the Seanad. And I agree with him, with Senator O’Toole, and with Senator Quinn, that the Finance Bill may not be what we would like to see, in terms of its measures, but it is necessary.
I would like to thank Senator Butler, Senator Leyden and Senator Ellis for their acknowledgement of the progress that has been made over the last number of years. Senator Leyden has endorsed the need for the bank guarantee. Senator McCarthy raised issues with it. I would reiterate that the introduction of the 2008 CIFS Guarantee Scheme succeeded in stabilising a challenging liquidity situation for the Irish banks. Similar actions have been taken by other Member States in the European Union. Let me say once more, had that Guarantee not been introduced, we would not now have an economy, never mind a banking system.
I note also the points made by Senator Leyden, and by numerous Senators, including Senators Hanafin, Butler, Quinn, O’Reilly and Norris, in relation to green energy and its potential for this country. I should point out that this Government set a target of 40% of our electricity to be generated from renewable sources by 2020. Already we have achieved 15%. This target will be achieved through support from the REFIT scheme and through investment in the electricity network. The State energy companies are investing in renewable energy. EirGrid has planned €4 billion investment under its ambitious Grid25 investment programme. The ESB is investing in smart metering, electric vehicle recharging capacity, windfarms as well as supporting the development of certain emerging technologies.
This year we have provided €60 million in capital funding for the Retrofit programme- which will deliver energy efficiency savings through labour intensive employment. This year the Exchequer will fund €12m investment in ocean energy research, in addition to the activities of the ESB and Bord Gáis Éireann in promoting technologies capable of harnessing wave and tidal power.
I could cite many more examples of this Government's support for green energy- covering tax incentives, information programmes, Exchequer support and the involvement of commercial State companies. In short, investment in energy efficiency and renewable energy is an integral part of this Government's activities.
I would remind the Senators also that the Business Expansion Scheme is being revamped and renamed the Employment and Investment Incentive. This incentive will target job creation in companies through additional tax relief which will be awarded where it has been proven that employment levels have increased at the company at the end of the holding period or where evidence is provided that the company used the capital for expenditure on research and development. It will be easier for companies carrying on green energy activities (i.e. activities undertaken with a view to producing energy from renewable resources) to qualify for the incentive and thus raise funding.
In respect of Senator Quinn’s and Senator Ellis’ comments re the abolition of the patent royalty exemption: The exemption is being abolished on foot of a recommendation to this effect in the Report of the Commission on Taxation, which expressed reservations about the effectiveness of the measure in incentivising companies to engage in R&D activities in Ireland. The Government concurs with this recommendation and considers that, despite various refinements made to the scheme over the years, the tax relief does not provide sufficient value for money. The abolition of the relief was announced in the National Recovery Plan and is effective from the date of the publication of the Plan. It will provide a saving of some €50 million for the Exchequer in a full year.
Senator Quinn mentioned that first time buyers were adversely affected by the Stamp Duty changes and asked whether a transitional period could be put in place. I have provided for a transitional arrangement, for circumstances where the effect of the Budget changes is to increase the Stamp Duty payable on the transaction. Stamp Duty can be paid under the old regime where a binding contract is in place before 8 December 2010 and the instrument is executed before 1 July 2011.
I would also advise the Senator that the proposed “pay and file” self-assessment changes were withdrawn by me with a Report Stage amendment in the Dáil.
Senator Ellis referred to the price of petrol and taxation, especially the carbon tax. In that regard it should be noted that the Carbon Tax amounts to only around 3.4 cent per litre of petrol and 4 cent per litre of auto-diesel. It has also to recognised that petrol, and especially auto-diesel, are cheaper in this State than in Northern Ireland.
I would note the support voiced by a number of Senators, including Senators O’Malley and Ormonde, for the changes I have introduced in relation to the restriction of property-based tax reliefs.
Finally, I would like to acknowledge the positive economic statistics quoted here today by Senator Mary White. On that positive note I would like to conclude my response and I must thank the Senators for the constructive debate we have had today.
I hope I have addressed the points you raised.