I'm very pleased to be here to address you this evening at your annual dinner. The Finance Bill, 1999, is now making its progress through the Oireachtas, and will begin Committee Stage next week. I think it appropriate at this time that I should devote much of my remarks to the major features of the Bill, and to focus on those issues of greatest interest to tax professionals. I will concentrate on the reaction to the new powers which the Bill proposes be made available to the Revenue Commissioners to combat tax evasion, and on the radical new pensions package proposed in the Bill. Any Finance Bill must, however, be set in the context of the general budgetary and economic situation.
For the Irish economy the 1990s represented a period of exceptional performance. GDP has grown by an average of 9 per cent per annum since 1993. Employment has expanded by more than a quarter and unemployment has fallen to below 8 per cent. The basis of this performance was economic stability. This growth has occurred against a background of moderate inflation and a prudent approach to fiscal policy. In addition social partnership agreements, linking moderate wage increases to targeted tax reductions and improved social services, improved the economy's competitiveness.
Taxation policy has played a crucial role in the economy's success. Turning now to the Finance Bill.
Proposed new Revenue Powers
The issue of Revenue powers always provokes a considerable debate. We have been down this road before but in very different circumstances. On each occasion, there has been a genuine reluctance to expand the powers of the State in its dealings with taxpayers. As the Minister said in introducing the Bill, there has been an ambivalence here. The taxpayer is rightly concerned when cases of tax evasion come to notice but may shrink from giving new powers when these are suggested.
If there is any propitious time to resolve this dilemma it is now. As the Chairman of the Revenue Commissioners has said, public confidence in the tax collection system has taken a dent. We need to repair that damage. We need to do so in a measured way and this is what the Government has sought to do.
The Revenue Commissioners have given a general public assurance that they will exercise these powers only in those cases where it is necessary and where there are firm reasons to suspect tax evasion. The powers are not being sought so as to hound the small man or woman or to conduct busybody searches of individual's bank accounts. I am heartened by the public acknowledgement by leading tax consultants that Revenue have not abused their existing powers and can be expected to behave in a like manner in the future. br>
Nonetheless, there still appear to be concerns. Your President has argued the case for a separate tax ombudsman to oversee the use of the new powers and has referred to the position in the UK as the appropriate model.
I should say, firstly, that the Government is as anxious as the Institute to get the balance right between the need to pursue the effective collection of tax and the rights of the taxpayer to fair treatment. For that reason, the contribution of the Institute to the debate is worthy of careful examination, as are the views of individual members. The Institute has had the opportunity to present its views to the Minister earlier this week and we will reflect on these.
As you know, there are already considerable safeguards in the operation of the tax system. The Ombudsman's remit already runs to Revenue and last year some 130 new cases were received by him. The tax acts provide for taxpayers to appeal to the Appeal Commissioners and to the Courts to vindicate their rights. There are strict internal procedures in Revenue where complaints of unfair or unwarranted treatment arise - these are not confined to audit cases. If further safeguards are seen as necessary, the Government will act on these and I have already undertaken to keep the position under review.
Comparisons of Irish and UK practice are often useful when dealing with commercial law, including tax law, since we share many legal, operational, professional and ethical standards in common. In the case of the current comparison there are a number of factors to bear in mind:
These are important differences when it comes to comparing the law and practice here and in the UK and in borrowing administrative models from there. In some ways we are ahead of the UK in the balance we strike between the rights of the individual versus the needs of the State. I understand also that in the UK the Inland Revenue Adjudicator is appointed by the Inland Revenue itself and reports to the Board of the Inland Revenue. br>
If we are going to make international comparisons of Revenue powers, let us have a more complete picture. As was indicated in the Dáil, the powers proposed in the Finance Bill were not dreamed up on the spur of the moment or simply plucked off some tired wish list going back years. They were subject to particular study and scrutiny. Part of the process, which was signalled clearly in the aftermath of the McCracken Report, involved the preparation of a special report by the Department and Revenue on the powers of other relevant tax administrations - the UK, France, Germany, the Netherlands, Sweden and New Zealand. The existing powers of the Revenue Commissioners, particularly in regard to access to accounts, lag well behind other countries. Some examples may help clarify the situation.
In New Zealand: With the approval of the staff "Team Leader" a revenue officer with appropriate delegated authority can serve a notice on a bank seeking third party information.
No independent consent or order is required.
(This, I believe, is more or less the position also in Australia.)
In Sweden: An authorised officer, normally the equivalent of a District Inspector, can request from a bank all information on a named customer.
In the case of an unidentified customer the request must be made by the Swedish Tax Board - the equivalent of the Revenue Commissioners.
In France: An authorised revenue officer is entitled to make any reasonable demand for third party information from a bank and the bank is obliged to comply.
No independent consent or order is required. br>
In Germany: The position is largely the same as that in France in respect of access to bank accounts.
The Report on the practices in these other States also noted that in the case of the Netherlands and Germany, it is not unusual to have tax officials sited full-time in the banks.
The Finance Bill proposals should be seen in this light. It would be wrong to suggest that the course we propose leaves us well ahead of other reputable States when, in fact, this is not the case.
There still seems to be a mistaken impression about that Revenue will have unfettered powers to trawl through bank accounts. This is totally wrong. Before seeking access, Revenue must have reasonable grounds to believe that there is particular information in the possession of the financial institution relating to the taxpayer's liability to tax. If Revenue do not have these reasonable grounds, they will not have access to anybody's account. Revenue have already indicated that they will give notice to the taxpayer concerned and, if necessary, the taxpayer can take court action for judicial review. The Minister for Finance will consider whether these aspects need to be included specifically in the Finance Bill, but they will apply in any case.
If anything, recent events re-inforce the need for appropriate powers to be available to investigate, examine and secure the information necessary for the pursuit of tax evasion. This is one element in the actions which are needed to ensure that the public are able to have confidence in the tax system, not only that it is fair to them, but that those who rightly owe taxes will be required to pay them. The rapid creation of wealth in the last few years has made people more aware of the need to share these gains more fairly in society and to expect a fair contribution from all to the running of the State and its services. The objective of restoring full confidence in the administration of the tax system is one that all of us here shares - Government, Revenue and tax practitioners - and I welcome the support of the Institute in this task.
If an example is needed of the damage that tax evasion can do to a country's standing, one need only look at the problem of Irish Registered Non-Resident companies, which has been a sore issue for some time. I have to say that the need for urgent action was brought home to me on seeing an advertisement for the services of agents who could set up such companies appearing in the Aer Lingus in-flight magazine. The wrong impression of Ireland created by such notices can do a lot of damage to our cause when arguing our case internationally on various subjects. I am glad to say that the Finance Bill measures, combined with the forthcoming Company Law Bill, should bring the situation under control and get rid of the undesirable use of such companies for questionable purposes by persons with no connection with the State. br>
New Pensions Provisions
Radical structural changes are proposed in the Bill for pension provision - changes which will be a challenge to the existing way of doing things and which will present new opportunities to providers of pension products. The changes, however, are in the interest of those who count, that is, the pensioner who has worked and saved to accumulate the pension fund.
The proposals were set out by the Minister for Finance on the publication of the Bill on 11 February, and the detailed provisions will be introduced on Committee Stage next week. These proposals are fair, reasonable, balanced and well thought out, although the pensions sector has some trepidation. However, the Minister has received many representations from and on behalf of the pension clients who feel strongly that the current system offers too little choice and flexibility and accordingly does not seem to operate sufficiently in the customer's interest.
The Bill as published increases substantially the annual amounts which may be claimed as a deduction for funding of retirement provision. The new limits range from 15 per cent of net relevant earnings to a maximum of 30 per cent depending on the age of the contributor. The 30 per cent maximum also applies to persons in certain occupations and professions irrespective of age where there is a limited earnings span. The Bill lists a number of such occupations relating to professional athletes in the main but allows for this list to be extended by Regulations to other specific occupations, if the Dáil approves.
These limits will be subject to an earnings cap of £200,000 per annum.
These increases in limits are part and parcel of the pension package announced on 11 February which will give effect to the principles set out in the Minister's Budget day speech as his guiding aims in reforming the rules in this area. These principles were that:
The new rules seek to give greater choice in how people plan to fund their retirement; greater flexibility in how they use their accumulated funds; and a greater say in how their pension scheme is run. At the same time prudent requirements to preserve pension assets via the approved minimum retirement fund will be set down. The taxation principle that pension contributions and the investment fund, as it accumulates, are tax exempt, while the draw-down or realisation of the fund is subject to tax, will be preserved. br>
Nevertheless, account will be taken of particularly sensitive areas in this tax treatment, namely the position of the surviving spouse and minor children. The rule which forces pensioners who wish to access their lump sums to take out an annuity at the same time will be removed. They will now be able to chose between the annuity and the new pension option which will now be provided for.
These proposals are radical. They are also pro-consumer. There has been unease about the appropriateness of current pension arrangements. The rules in this area have not been dusted down for thirty years. Times change, circumstances change, peoples' expectations change. So too must the way we look at pension provision. The changes which are being made will be for the better and I hope that you here tonight will see the wisdom of this course.
State Aid Rules
There has been considerable publicity in recent months about the impact of EU State Aids rules on various Irish tax reliefs, particularly those relating to property investment.
As you no doubt know, the EU Commission has considerable powers in the State Aids area under Articles 92 to 94 of the EU Treaty and in fact has recently issued a document about the application of State Aid rules to direct business taxation measures. Ireland's greatly improved economic performance over the last few years has led to a much greater level of scrutiny by the Commission of our tax incentives. Also, the fact that a large part of the country will move from being a less developed 92(3)(a) region to being a developed 92(3)(c) region at the end of 1999 will limit the type and intensity of various taxation reliefs that have applied up to now throughout the entire State.
Irish Ministers and officials are consequently finding it more difficult to obtain EU approval for various schemes. Furthermore the EU Commission is taking a stricter line on non-notification of various reliefs than it did as recently as only 12 months ago. State Aid rules apply in the same manner to all member States. Ireland is not being specially singled out in this regard. br>
As regards the tax reliefs in the Custom House Docks Area, we have successfully secured the capital allowance regime and discussions are currently taking place with the EU Commission in regard to the double rent and rates relief, though it will take some months yet for this mater to be finalised. We have a strong case to mount and I believe we will be successful.
Going forward, the Commission has set its face against double rent relief and rates remissions as operating aids and these will not be approved by them in the future for areas outside the Article 92(3)(a) region. The criteria for Article 92(3)(a) areas are the same as those on which Objective 1 status is based. There are, thus, additional benefits to be gained from securing such status for as much of the country as can be justified. The Irish authorities are actively engaged in discussion at present with the EU Commission on these State aid issues in the context of the new urban renewal scheme to get the business elements of these schemes approved as soon as practicable, but this will take time.
I hope that I have given some insights into what motivates tax changes in the Finance Bill. Whether one agrees or disagrees with them, they are, I assure you, the product of careful thought and examination.
I am very glad to have had this opportunity to make these points before you here tonight and I thank you for your close attention to my remarks.
I wish both you and the institute every success in the future and look forward to a continuing constructive dialogue with your Institute on important tax issues.
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