Wednesday, 7 December 2005
Dáil Eireann Debate
Financial Resolution No. 2 is on income tax. It changes the tax treatment of certain earnings covered by the remittance basis of taxation, a basis which applies in circumstances under the current system. Where an employee, although resident and employed in the State, is either not domiciled or not ordinarily resident in the State, he or she may avail of the remittance basis of assessment in respect of income from a foreign contract of employment other than United Kingdom employment. This confines his or her tax liability on the earnings on such employment to the amount remitted to the State in the tax year. Earnings that are paid outside the State or the United Kingdom and are not remitted into the State are not liable for tax here. That is the present system, which used to be a limited system mainly for some of our people who were domiciled abroad. It was a narrow issue. When I was in that job, only a handful of people used to benefit from it.
In recent years, however, there has been increasing use of the remittance basis in the tax planning of remuneration packages. The Revenue Commissioners have indicated that the remittance basis is now being increasingly used in a wide variety of enterprises. In many instances, although categorised for tax purposes as covered by foreign contracts of employment, the duties of the employment are actually performed mainly, if not wholly, in the State. The individual is here to work but the payroll is going elsewhere. They are given what is needed for essentials here and only pay taxes on that. This is now being widely used. For example, use of the remittances basis appears to be a feature of many construction companies which use non-domiciled workers.
The Taoiseach: Yes. It is also being availed of by returning Irish expatriates working here during the three year period after a return, during which they are not ordinarily resident in the State. The remittance basis of assessment is of long standing and was intended originally for genuine foreign income. However, there is increasing evidence of residents who are either not domiciled or not ordinarily resident here arranging their affairs so that they can avail of the remittance basis, with a clear objective of reducing their tax liabilities.
While technically the income concerned may be treated as sourced abroad because of foreign contractual arrangements, in substance it is Irish income because it is earned for work done here. It is the reason people are seeing a high number of workers without the corresponding income tax revenues, an issue which has been discussed for the past few years. It is no longer acceptable that taxpayers should be able, by such artificial arrangements, to avail of the remittance basis to reduce their tax liabilities in respect of their employment income. Therefore, the resolution before the House proposes to abolish the remittance basis of assessment in respect of employment earnings to the extent that those earnings are attributable to the performance of the State of duties of the employment.
The change will ensure equality of treatment for tax purposes for all Irish resident employees, regardless of nationality. The change will take effect from 1 January. The yield from the measure is estimated at more than €50 million in 2006. I recommend the resolution to the House.
Financial Resolution No. 3 also concerns income tax. It is a curtailment of relief on loans used for acquiring interest in companies. The resolution will re-focus the relief which is available to individuals in respect of interest paid on loans used for the purpose on acquiring an interest, either by way of equity or loan capital, in certain companies. At present, the relief covers both trading companies and rental companies, that is, companies in which income arises wholly or mainly in the form of rents or other income from property.
The relief was examined as part of the review of certain tax incentive schemes and exemptions that were announced on this day last year by the Minister, Deputy Cowen. The original objective of this tax incentive was to encourage economic activity and employment by assisting those involved in companies to invest in those companies. The review of the relief found that the relief for interest costs of investing in rental income companies is not effective, at this stage, in achieving its original objective.
Like all significant tax reliefs, this one can be the subject of tax planning attempts. What is new? There is evidence that the relief, particularly as it applies to rental companies, has been used to fund the acquisition of overseas properties, where people can individually or collectively buy a property abroad and claim the interest relief on that against their entire incomes here. Obviously, this was not intended, so we have introduced this resolution to the House and propose to deal with the abuse by excluding rental companies from the ambit of the relief altogether. Loans taken out after today will accordingly no longer qualify for relief.
I should point out that existing loans are not affected by the change because they have already been dealt with and one cannot have retrospective taxation. Nor are loans applied to acquire interest in trading companies, which will continue to qualify for what was the original issue. It is the close down of what was there. The yield from this measure is estimated to be negligible in 2006 and €5 million in a full year. I commend the resolution to the House.
Mr. P. McGrath: I am amazed at the amount of money involved in these two small resolutions, which seemed insignificant when put on the Order Paper this evening and outlined in the budget document today. However, it is staggering that one will yield €100 million in a full year.
Mr. P. McGrath: A couple of questions arise from the matter. With regard to the approximately 200 people who earn in excess of €200,000 per annum but pay no income tax whatsoever, are they among those who will be closed down by this measure or do they form part of a different category covered by capital allowance?
I was told that this measure is aimed at executives of some of the big foreign companies based here which employ a lot of people, mainly in the Dublin area. Some of the chief executives of these major multinational companies earn high incomes, which are paid to them abroad. Are they among the people being referred to and, if so, will there be consequences from that? If company A plans to expand here and will need three or four more executives, is it likely that it will continue to expand or establish a new plant here or is it likely to say, “to Hell with that crowd over there”, because we have caught up with it, and disappear or otherwise with possible job losses? Are those the kind of people who will mainly be involved, or will it be the companies here involved in PPPs, who have executives in Ireland on a temporary basis, perhaps building a road, and paying part of those people’s salaries here and part abroad?
I would like the Taoiseach to clarify this matter. I know he does not want to name in the House the particular companies or executives being targeted, and I would not expect him to. However, the Taoiseach might give us some sort of profile of these people so we know exactly what is involved.
Mr. Rabbitte: Like Deputy McGrath, I have been taken aback by the scale of this matter. I welcome the first of these two motions but am taken aback by the apparent extent involved. There is reference to income arising from possessions outside the State. As I understand it, “possessions” means income arising from any source, and according to the note provided to me by the Chief Whip, the tightening up envisages a yield of €50 million next year, €75 million in 2007 and €100 million in a full year. I must be forgiven for being dense but I do not understand that. If the figure for 2007 is €75 million, what is meant by €100 million in a full year? I thought we were talking in calendar year terms in this instance.
A figure of €50 million is envisaged for 2006. In section A.25 of his speech today, the Minister for Finance said that the ending of the scheme in question should save the State up to €100 million per year in lost income tax revenue. There is probably a very simple explanation for the figure being given as €60 million for next year while the Minister gave a figure of €100 million in a full year. Can the Taoiseach clarify this point?
As Deputy McGrath noted, the puzzle lies in whether we are referring to a number of very highly paid executives of international companies or talking of a great number of employees if the yield could be up to €100 million. Given that one is not domiciled in this State and not ordinarily resident in this State, that must imply that in most cases one arrived with the company and one’s country of domicile is the United States, Germany or wherever. One is not an Irish citizen domiciled in this State, and so on. I did not know there were that many people involved, unless of course as Deputy McGrath said, we are talking of a finite number of very high earners.
In any event, the move is very welcome. I am interested in the Taoiseach’s point that it partially explains that apparent discrepancy whereby the numbers at work have been expanding more or less exponentially for a dozen years, while the income tax receipts do not seem to reflect that. It would be interesting to know if the Department of Finance has made a stab at establishing roughly what proportion of that gap it explains.
I have no difficulty with the second motion. The ingenuity of the tax advice industry never ceases to amaze me. I saw a spokesperson for that industry speaking on television recently, a person with whom Deputy Ardagh and myself are familiar, and that industry’s ability to see a loophole in a new scheme seems unlimited. The purpose there was obviously not to acquire overseas property in the manner suggested by the Taoiseach.
I will again feign stupidity and ask about the original intention of the scheme. The Taoiseach said it was to generate economic activity but I am not quite sure if we were facilitating high net worth individuals in taking an equity stake in a company which manages a property portfolio——
Mr. Rabbitte: I see. I notice that the yield is negligible. I fully understand it cannot be retrospective but that in a full year it is estimated to bring in about €5 million. I am happy to support that resolution.
Mr. Sargent: We are following through here on a standard practice of coming to these resolutions for the first time and naturally, the surprise being expressed is on the basis that we have not been discussing or expecting this particular financial package.
That brings me to a valid question. The Committee of Public Accounts, to which Deputy Rabbitte was central, supported by Deputy Boyle of the Green Party, brought in guidelines asking that the budgetary process involve consultation in advance, so that there could be more pooling of experience, with hopefully a better outcome to the process, rather than simply being bounced into discussions without the prior information being available to us. I know the various Oireachtas committees will be more involved in the process but I would like to know if the Taoiseach has taken stock of those guidelines and has a view on the matter.
The resolution we are discussing probably arises from the Department of Finance’s public consultation on reducing tax avoidance by high earners. Is that from where the incentive comes? Will the Taoiseach outline whether he is going to take note of the advice, which seems to be that when an incentive is being questioned and assessed, the cost benefit analysis should be published so people can take into account the full economic, social and environmental costs? That would bring a level of transparency which for no good reason is missing.
Will the Taoiseach accept the advice that these reliefs should be limited in terms of time, rather than being established at budget time, on a whim, so to speak? Will he outline if the measures he is announcing now are on the basis of practice in other countries? I know, for example, that the US authorities are quite careful to ensure that money earned by US citizens makes a return to the US exchequer. Where is the Taoiseach’s advice coming from with regard to this resolution? Is it based on best practice in other countries? Can the Taoiseach make comparisons in that regard?
Although we are being given an indication that money will flow to the Exchequer on the basis of this resolution, will the Taoiseach look again at the maximum tax relief threshold which the Government has put in place in this budget? An income threshold of €250,000 seems quite high. In terms of defining high-income earners, €100,000 would be considered by many to be a good wage. Will the Taoiseach reconsider the €250,000 threshold, which seems to indicate a willingness to accept the wide gap between rich and poor which has grown in recent years?
This is an activation budget the purpose of which is to get people back to work and to ensure everybody pays their fair share of tax. In this regard, it is interesting to note that the budget is concerned not only with ensuring that people domiciled abroad who make their income in Ireland should pay income tax here. It also aims to ensure more old age pensioners get an opportunity to enter the workforce by allowing them to earn up to €100 per week before their pension is affected. The threshold for single parents has increased by another €82 a week to €375. This will allow more tax to be paid by people on small incomes. Moreover, the income disregard for carers has gone up by €20 for a single person and €40 for a couple. A couple can earn €580 per week and still qualify for the carer’s allowance.
Mr. Ardagh: It is relevant in the overall context of how much tax people will pay. When couples who provide a caring role or single parents earn as little as €580 or €375 respectively, they are within the tax net. Just as they are prepared to pay tax, it is incumbent on the person domiciled abroad to pay a fair share. Carers will now be able to work up to 15 hours per week.
Mr. Ardagh: I will take on board what the Leas-Cheann Comhairle has said. In regard to Financial Resolution No. 2, Deputies Paul McGrath and Rabbitte have expressed their astonishment at the figures. I too am astonished. It is fortuitous that the Minister for Finance has clamped down on this now rather than in three years’ time. It is important the staff of the Department of Finance have the resources, confidence and ability to clamp down on this type of tax avoidance system and ensure that those people who work in Ireland pay the correct amount of tax.
We have all seen newspaper reports in the last eight or ten months detailing the numbers of properties bought by Irish people abroad, mainly in London but also elsewhere in Britain, eastern Europe and Canada.
Mr. Ardagh: Financial Resolution No. 3 attempts to try to deal with this issue. Relief has heretofore been available on the interest on the loans used to buy the shares in these property rental companies. It is appropriate that this interest relief is disallowed. The estimated yield for 2007 in respect of this resolution is €5 million. Given the extent to which major property magnates are purchasing properties abroad, I am sure we could have lost far in excess of this sum. The Taoiseach said this is only an estimate and I suggest €5 million is a very conservative figure. I support Financial Resolutions Nos. 2 and 3.
Caoimhghín Ó Caoláin: I suspect, contrary to the supposition of earlier speakers in this debate, that those who have heretofore qualified under the remittance basis of taxation are not all non-nationals. The reality is that many are Irish citizens who have been able to configure their arrangements in such a way as to benefit under this arrangement. I welcome this measure because it is clearly geared towards addressing a serious situation. I acknowledge the Taoiseach’s point that these are estimates. We must wait and see. The intent is good, however, and there should be a broad welcome for it.
I ask for clarification on one point in the short briefing prepared by the Department of Finance for this debate. The first paragraph states the remittance basis of income taxation “applies at present to individuals resident here who are either not domiciled or not ordinarily resident in the State” and provides that such individuals are “liable to Irish income tax only on that portion of their income arising outside the State or the United Kingdom that is remitted here”. Will the Taoiseach clarify that income apart from the remittance approach to payment that is earned here is fully taxable? The wording might suggest otherwise.
In regard to Financial Resolution No. 3, the change in respect of tax relief for interest on personal loans applies only in the area of loans taken out to acquire an interest in property rental income companies. The tax relief for interest on personal loans in regard to other business and investment opportunities is maintained. It is my understanding that it is only in this particular area that the change is proposed. Will the Taoiseach confirm this is the case? Although it seems to be small fry in terms of the overall return, I commend the effort to close off any such abuse.
Mr. Durkan: I require clarification on a point. Given the substantial amount of money accruing from Financial Resolution No. 2, will it have any negative impact on, for example, United States, German, other European or non-European companies operating here? If so, can the Taoiseach quantify precisely what that impact will be? I ask that question because there seems to be a large and increasing amount of money involved. It could be that the estimate in this case is on the conservative side, as was the case with some of the Department of Finance’s estimates in the past. We might have learned by this time next year that the amount of the money involved is much more substantial.
I am particularly concerned about the many US companies which have invested here and provide significant employment. I would like the Taoiseach to tell the House whether this proposal will affect in a negative way companies of that nature which have further and ongoing investment plans. If so, has that impact been examined? To what extent will such companies be affected? There are many investors, including Wyeth, Hewlett-Packard and Intel, offering substantial employment in my area. They are all good employers which pay well. Will this proposal impact negatively on such companies’ management personnel, who might not be domiciled here? Such people might be on loan from a parent company outside the State, for example. I am also concerned about employees who are domiciled here, but spend part of their time in other countries, such as the United States, Germany or Israel, where some of the multinational corporations in question have subsidiaries. It is important to be able to reassure such investors that this proposal will have no negative impact on them and that it will not offer them any disincentive. We need to be able to tell such people that they will not have to take any restrictive measures as a result of this proposal.
The Taoiseach: Can I respond to that set of questions before I leave? The Tánaiste will take over from me. A number of issues have been raised. I was asked to say what is the remittance basis of taxation. Individuals who are resident here, but who are not Irish-domiciled or not ordinarily resident here, pay tax here on the full amount of their Irish-sourced or UK-sourced income and also on that part of their foreign income — their non-Irish and non-UK income — that is brought into the State. That is the remittance basis of taxation.
Deputy Sargent asked about where the proposed level comes in. The examination showed that the difficulties and problems are caused by high earners — people earning over €250,000 per annum. The Revenue Commissioners’ examination showed that there are some problems in that regard. That is why that figure was chosen. Such people were paying and doing things as per order.
The Revenue Commissioners stated in their report on the 400 individuals with the highest incomes that certain individuals have been using the relief for interest on loans to acquire interests in various companies. That relief was included in the general review of tax reliefs for that reason.
I assure Deputy Rabbitte that an employment under a foreign contract is deemed to be a foreign possession for tax purposes if the pay point is outside the State. The difference in figures can be attributed to the fact that the remittance basis has been more widely used. It is quite obvious that its extension and stretching out have been increasing. The figures are different because they are providing for a growing trend. The figure of €100 million is not based on the estimates for 2006 or 2007, but on a progression of increases in abuse. That is why there will be a yield of €50 million and then of €75 million. As I have said, they are estimates. The remittance basis has no effect on high earnings. It primarily affects non-Irish domiciled persons. I will return to the question of who it will affect.
I was also asked about interest relief. The original intention of interest relief in the 1970s was to encourage investment in companies and job creation by assisting employment-creating companies in the State. We can no longer easily distinguish between investment here and investment elsewhere in the EU. The relief has been restricted to investment in trading companies to stop it from going primarily to foreign property investment. It is easier to tie it down that way. Interest relief of 66% was obtained by persons with incomes in excess of €200,000. The remittance basis is relevant to the top 200 earners.
The Minister said in his Budget Statement that he proposes “to publish all the relevant reports reviewing these various tax reliefs in time for the Finance Bill”. The remittance basis will also apply to Irish nationals who have come back after being abroad for several years. They will be able to use it for a three-year period.
In the 1980s, when income tax rates were very high, senior employers used different means and mechanisms of being paid through God knows where to get reliefs here. That was a standard enough practice at that time. Our current tax rates are very attractive internationally. I hope no employers are behaving in the manner suggested. In any event, the last two heads of Intel, for example, were Irish. The phenomenon of senior people in our top companies, such as Dell, being Irish is increasingly notable. It was not that way when tax rates were high. There is an attraction. If senior people are operating in the manner that has been highlighted — Deputy Paul McGrath was right to suggest that some senior people are probably finding that they can do it on that basis — they should not be doing so, in my view. Why should people who are earning €300,000 or €400,000 get away with organising their affairs through Germany and paying a few euro here for their bed and breakfast and their dinner? The person down on the bottom floor, who is looking after the door and watering the plants, is paying tax, so que sera——
The Taoiseach: Yes. I am sorry for them, but they should look after their affairs. I cannot see, subject to the great wisdom of the people on the right, how we can draw up a system — I would not ask them to do so — in which we would try to include such people. The tax system is based on the principle of equity — that is my point. Deputy McGrath is right to point out that there are some people there.
Mr. Durkan: It might be even worse, and the Taoiseach might have to anticipate it as well. I suspect from the Taoiseach’s body language that not every aspect of the implications of the proposal has been fully examined.
The Taoiseach: Deputies Rabbitte and Sargent asked whether this is just related to high earners. No, it is not. It is clear from the report of the Revenue Commissioners that schemes and arrangements which are used on a remittance basis are in place in a wide range of sectors, including the IT, banking, insurance, pharmaceutical, pharmacy, mining, fishing and construction sectors. They are arranging their systems. It is probable that an agent or a company is taking a few hundred employees, possibly including people who have nothing to do with it, and paying them abroad.
The Taoiseach: It will not affect the people about whom the Deputy is speaking if they are paying it on the equitable basis on which they should be paying their taxes in Ireland. Did the Deputy ask about US employees?
The Taoiseach: That is restricted to pay remuneration for work done in the State. To the extent that foreign executives are paid for foreign duties or paid for their salaries, they will not be affected. If some of them are using it, what they will do in those companies is that they will restructure their remuneration package for the executive and then we will get our share of it in Ireland. The system has been abused. As Deputy Rabbitte said earlier, as always there is no end to what people see. Remittance was a very tight definition for a very tight group and now because there is a lot of movement in the country with a large number of people coming in, they have structured it in a way that they just get the bread and butter money paying tax here and the rest is paid elsewhere. I hope there is no special fee and they should not be listened to anyway.
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