Tuesday, 5 July 1938
Dáil Éireann Debate
(1) That where any funding bonds are issued to a creditor in respect of any liability to pay interest on a debt to which this Resolution applies, the issue of those bonds shall be treated for all the purposes of the Income-Tax Acts as if it were the payment of an amount of the said interest equal to the value of the said bonds at the time of the issue thereof, and the redemption of the said bonds shall not be treated for any of the said purposes as payment of the said interest or any part thereof.
(2) That this Resolution applies to all debts owing by any government, public authority, or public institution whatsoever or wheresoever and to all debts owing by any body corporate whatsoever or wheresoever.
This is a case which I also referred to in the course of the Budget statement. It is similar in some respects to the case which has been already dealt with in motion No. 1. A foreign Government issued funding bonds in settlement of interest due on one of its Government loans. They were not able to meet the charge on the loan on the due date and issued funding bonds instead. The English courts have held that in such a case the value of the funding bond was not income to the recipient. The Resolution which we are now dealing with provides that in such a case the issue of a funding bond shall be treated for income-tax purposes as if it were the payment of an amount of interest equal to the value of the bond at the time of issue and, as a corollary, that the redemption of the bond, when it is redeemed, shall not be treated as a payment of interest.
General Mulcahy: The Minister in  the course of the last answer he gave on the previous motion was more confusing than in anything he said before and seemed to contradict everything he said before. It would help us to understand this case if he would deal with a specific case, imaginary or otherwise. The statement of the Minister, which was in general terms, is very difficult to understand and, in view of the fact that his last statement contradicts everything we understood from him before, and is probably wrong, I suggest that it would be much more informative if the Minister would deal with a concrete case.
Mr. MacEntee: When a Deputy alleges that another Deputy is wrong, surely it is incumbent on the Deputy to show that, in fact, the other Deputy is wrong. I do not think that these wild statements of Deputy Mulcahy have the least value. I have to repeat what I have already said, that where a foreign Government issues a funding bond in settlement of interest due in respect of any of its loans—I do not know whether it is necessary to explain what a funding bond is—the court has held that in such cases the value of the funding bond is not income of the recipient. I do not know whether it is necessary to explain who is the recipient. He is the person who gets the funding bond. I hope the Deputy is listening attentively to me.
Mr. MacEntee: There are no figures. We are discussing a general principle. No specific case has arisen here and we are merely making quite certain that should such a case arise, a decision which, from our point of view, would be very undesirable would not be taken by the court. The clause before the House provides that in such cases the issue of a funding bond shall be treated for income-tax purposes as if it were the payment of an amount of interest equal to the value of the bond at the time of issue and, as a corollary, that the redemption of the bond, when it is redeemed, shall not be treated as a payment of interest.
Mr. Cosgrave: Will the Minister take  into account that the funding bond may possibly include five or six years' payment of interest? Is the income-tax payer to be charged, in one year, tax for the accumulated interest of five or six years which in the normal course he should receive in five or six smaller sums?
Mr. Cosgrave: Precisely. That is the point I am arguing. A person may receive, by way of a funding bond, five years arrears of interest in one year. Is he going to be charged income-tax on these arrears of interest, as if they represented his normal income for five years? If so, it may happen that by reason of the non-payment of the interest during these five years a person may have to pay five times the amount which he would ordinarily be called upon to pay if he had received the interest yearly.
Mr. Dowdall: I presume the Minister does not intend that the Inland Revenue authorities would make application to an income-tax payer for tax on a funding bond of that description except it was really equivalent to a dividend warrant.
Mr. MacEntee: On the point which Deputy Cosgrave has raised, it is quite clear that if a funding bond carried two years or three years interest, the usual practice is to charge tax upon the income received in that one year. No taxes have been charged in the preceding years. It may happen as a result of that, that a person may be charged at a higher effective rate.
Mr. Cosgrave: That is what I mean. This Resolution ought not to mean a greater liability on any individual. It  ought not to mean a greater liability on an individual income-tax payer than if he had been regularly paid the interest during each of these five years. Take the case of a man who is supposed to receive £200 in dividends each year. For the years 1933, 1934, 1935, 1936 and 1937 he does not receive any interest. Then suddenly in 1938 he gets a bond for £1,000. If this Resolution is passed, it would deprive him of the advantage of getting the lower rate, or of not being subject to the higher rate. He has had the disadvantage also of not getting his money for five years, in the first instance. Having remained out of his money for five years, it is, I suggest, unfair to charge him at the higher rate which the issue of the bond for five years arrears would impose upon him under this Resolution. It ought not to be outside the bounds of possibility to arrange that he would be only liable for whatever amount he would have been obliged to pay if he had received the income in each year of the five years.
Mr. MacEntee: This particular Resolution, I would submit, is not the place to raise that matter, because that principle, whether for good or for ill, runs and always has run—at least for a considerable number of years past—through the income-tax code. A person is charged on the full income which he receives in one specific year. If, for instance, a person has not been able to collect, for one reason or another, the interest in respect of a bond over a number of years, when that interest is collected eventually, it forms part of his income for the year he collects it. That is the whole principle. There is no departure from the general principle of the income-tax code in this Resolution.
Mr. Cosgrave: The Minister can explain whether or not it is a departure  from the income-tax code by dealing with this case which I shall put before him. I am taking the case of a person who was entitled to receive £200 interest each year, for five years. If he had received that income each year, he would be entitled to claim a personal allowance of £125 for each year, and he would be liable for tax at the lower rate on only £75. He suddenly gets a bond value £1,000 in respect of these five years, and he is charged at the rate of 4/6 in the £ for every £1 over £225. In other words, he has remained out of his money for five years and the Government then comes along and taxes him at three or four times the amount which they would normally have received from him. I am not dealing with rich people. They can afford to look after themselves. The Minister, having made overtures to them recently and having been successful in these overtures will, no doubt, also look after them. I am dealing with the case of a small person who had an income of only £200 or less. Take the case of a person who has an income of only £100 a year. In each separate year, there would be no liability at all on him to pay income-tax. But supposing that having got no money for five years, he gets a bond for £500 at the end of that period, he becomes liable for the payment of a substantial amount of tax in that year whereas, if he had received his interest each year, there would be no liability upon him to pay income-tax.
Mr. MacEntee: It amazes me how Deputy Cosgrave misses his opportunities. This is a case that would appear, at first sight, to be one of hardship. But the Deputy was, on one occasion, not merely head of the Government, but also Minister for Finance. He could have remedied this position then if he had so desired. Where arrears of investment interest are paid in one year, the income of the recipient has always been deemed to include the amount which fell to him for that one specific year, irrespective of whether the preceding years were lean ones or not. That has always been the position. We are not proposing to make any change. We are only saying that where instead of getting the  money he gets, instead of the cash, a funding bond, which may be disposable, that that bond will be regarded according to its value, as income of the person who gets it. That is the position here. We are not proposing to depart in any way from the general position.
Mr. Cosgrave: We are changing the law. We are making a new law. The Minister fears that the courts, at the moment, will decide against him, and he is making a law under which a person who was not subject to income-tax for five years, assuming that he had a holding of £100 and no other income, by reason of the funding bonds is going to pay income-tax and be charged at the rate of 4/6 in the £.
Mr. McGilligan: If it is retrospective, and if the law is deemed to be broken, there will be penalties. Is not that so? I think a constitutional point arises. There is a provision in the Constitution regarding offences that were not so on the date of commission. Does this not propose to do that?
Mr. Dockrell: I would like the Minister to consider the case of a person who, if he received income-tax  demands over a number of years, would have received allowances but, by reason of not receiving income over a number of years the allowances fell to the ground. As the allowances fell to the ground by reason of a person not receiving sufficient income, or for some other reason, I think the Minister should let what is sauce for the goose be sauce for the gander. If income is regarded as the income received in one year, then the allowances should also be brought forward by the income tax payer. Another question arises regarding supertax. Would that come under the terms of the supertax for one year or be deemed to be spread over a number of years when making up returns?
Mr. MacEntee: That is a general question and does not arise on this matter. With regard to Deputy McGilligan's point, there is no substance in it at all. We are not legislating here to invalidate anything which has been done. We are legislating to make things lawful.
Mr. MacEntee: We may not be able, in so far as there might be an attempt on the part of someone, to evade it, to enforce it retrospectively. I am not certain what the courts would hold. We do not know what their view may be on the existing law. It may be that they would hold that this was not necessary. We cannot afford to take any risk, however, and we are not taking it. We would not be justified in taking it. Why should the Government charged with the collection of taxes not do so equitably?
Mr. MacEntee: Because there was a flaw in the drafting? Why should the legislature permit itself to be defeated when we can bring in a Bill to secure for the State what is justly owing by taxpayers who may wish to evade their liabilities and responsibilities?
Mr. McGilligan: If it is by the usual machinery of making it an offence to make a false declaration with regard to this matter, and if the Courts would not hold in accordance with the terms of it, are you not making something an offence which was not an offence at the date of commission?
Mr. MacEntee: The Bill does not contain anything which will invalidate anything already on the Statute book. So far as we know, the original provisions were drafted in such a way as to make it possible to deal with such income as is here concerned. A decision in another place was as to whether the draftsmanship was sound and not as to what was the intention here.
Mr. MacEntee: As to what it was in another place—Great Britain. That is where the doubt was caused. No one has raised the issue here yet. We are now getting a declaration as to what was the intention. As to whether it is a matter of penal legislation that will be decided by the courts when they have the existing provisions and the new provisions before them. If they decide that the existing provisions here are, as was held in Great Britain, then a question of penalties retrospectively might arise in the courts, but not otherwise.
Mr. McGilligan: The situation is that by a decision in another country the clause is rendered necessary. If  the decision here was the same as in England that clause would be necessary. It is rendered necessary to make the law what the Minister thinks it ought to have been, and that he is afraid the courts will pronounce it was not previously. The only way to enforce payment was by making certain things offences, with penalties. I would be pleased to know that all the rubbish at the bottom of the income-tax sheets after one has signed is not meant. The suggestion here is that there is a doubt. The Minister says it is hardly doubtful. The situation by the decision elsewhere is that this is necessary, and if necessary it does remake a particular situation with regard to the law. It is going to be made retrospective, because it did not apply for the year beginning the 6th April, 1938, and other years. What is the way to enforce it if it is required? I suggest it is through the ordinary machinery of enforcing court orders, where a system is adopted of making offences. This will make something an offence which was not an offence at the date of commission. That is forbidden by the Constitution. If you want to amend the Constitution you are bound to do it openly. If you pass this you run the risk that the Bill may be held up to get a decision from the Supreme Court as to whether or not it is an offence against the Constitution.
Mr. MacEntee: We are facing the possibility. The Deputy is aware that there is some difference between possibility and probability. In order that the possibility may not arise and that the State and the general body of taxpayers and citizens may not suffer consequent loss for the  benefit of one or two individuals who are not prepared to bear their fair share of the burden of the national service then we bring this amendment in to make the present position sound, to make it water-tight. Did the Deputy never hear of caulking a ship? I was just dealing with this absurd proposition here that because the English courts have given a certain interpretation of the law in their country that the Irish courts are going to follow that precedent. The Deputy is as well aware as I am—he ought to be better aware, he is a lawyer—that the Supreme Court and the Courts of Appeal in both countries have often been in conflict with regard to decisions on certain provisions of the Statutes, and it is quite possible that a view taken by our courts here would be different from that held by the courts in Great Britain. In order, as I have said, to avoid vexatious litigation, because it would be vexatious in this sense, that no Government could afford to allow that interpretation of the existing law to go unchallenged. The British Government against whom the decision has been given have not permitted it to go unchallenged—they brought in a provision to amend the law and make it effective——
Mr. MacEntee: There is no question of retrospective legislation here, not in the sense in which the Deputy wishes that word to be construed. I was saying that in Great Britain—if I may be permitted to speak without continuous interruptions—I was saying that in Great Britain they brought in a provision in the Finance Bill of this year——
Mr. MacEntee: This is not merely a case of what we have thought the law to be during the six years we have been in office but what Deputy Cosgrave and Deputy McGilligan and Deputy Mulcahy thought it to be during the nine or ten years they were in office and I think we are perfectly justified in taking that view of the law. The purpose of this legislation is to confirm that view. The question as to whether we should sue for penalties and recover penalties is a matter the courts might have to consider if in fact we did it, but, of course, we can collect the tax without recourse to penalties as the Deputy may know.
General Mulcahy: If the purpose of this amendment is to protect the position which in fact operates in the country at the present time, would the Minister say how much revenue annually is involved? Surely, if he proposes to operate in this particular kind of way, he has made himself familiar with how much revenue is involved in the matter.
Mr. MacEntee: According, first, to whether people were receiving interest on funding bonds; according to  whether they sold foreign securities and invested them in Irish securities, or whether they sold Irish securities and invested them in foreign securities.
General Mulcahy: So much has been said about the desirability of protecting the taxpayer by seeing that the revenue was not defrauded in any way, I would like to ask the Minister whether the amount involved in revenue last year was £50 or £5,000.
General Mulcahy: The Minister has not an idea, and he comes in here and he gives us long warnings about the necessity for doing justice to the taxpayer in this country by seeing that this particular motion was passed, and it is all eye wash. The Minister cannot tell us  whether it was £50 that was involved in this matter last year. He mentions £50,000 now, but it has as much relation to this subject here as, say, the £4,000,000 additional taxation that the Minister put on the unfortunate taxpayers in this year without blinking an eye about it.
Mr. McGilligan: I assume this is clear. In any event it is clear to this extent, that if this retrospective legislation has to depend upon the enforcement of penalties through the machinery of deeming things to be offences then it is unconstitutional.
Mr. McGilligan: The Minister does not say so. I suggest that it is. Let us leave out the bleeding taxpayer— the taxpayer whom the Minister is out to bleed so much—let us leave him out of it. It does not matter very much whether the revenue of the State or the taxpayer is going to be mulcted and for the sake of something that is very small and for the sake of something in regard to which a saving clause to protect the Constitution might easily be inserted. The Minister is just going to drive ahead with the casual remark—“We leave that to the courts afterwards.” Now, clearing away the verbiage, the situation is this. There has been an English decision interpreting the law in a particular way. The Minister is so far afraid that the courts here will accept that decision that he moves to amend the law and he moves to amend the law retrospectively. He throws all this into the ordinary framework of tax, income-tax, and tax collection, and one of the methods by which the tax payment is enforced is this matter of penalties, penalties because of offences. That is clearly bringing all that atmosphere, all that background of offences in upon this matter. Anybody who has listened to income-tax cases being decided must have ringing in his ears statements from judges that in the background always is this question of the offence that has been or may have been permitted if the matter had been pressed. Whether that is pressed or not, if the amendment here brings about such a  change that in fact something is declared to be an offence at a date when at the date it was committed it was not an offence then there is an amendment of the Constitution. That amendment may be meant; it may be even necessary to have the amendment, but there is a way of having the Constitution amendment laid down. There is a further thing. If a Bill is found to amend the Constitution when it is not meant to do so or if either the Seanad here or the President decides that the Bill does amend the Constitution or that there is some doubt about it then there is a question of reference to the Supreme Court and a possible reference to the people. And all that is going to be risked in order to get through here, casually and simply, a phrase which could be quite easily made foolproof by the insertion of two or three words. The Minister will have his own way.
Mr. Benson: So that, in fact, there is going to be income tax paid twice over, on the funding bond which has come in as interest and then becomes principal, and there will be a further income tax levied on the interest on that interest?
General Mulcahy: Briefly, the Minister is preparing here to secure that the people who last year expected money from people who were not able to pay, would get next year, or the year after, the interest on their funding bonds, and that they are not going to escape the Minister here. They may have their difficulties in countries abroad, where their money is invested, but whatever those difficulties are, and to whatever straits they are reduced, as soon as they get any kind of a halfpenny here the Minister for Finance will be after them.
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