OUR TAX LAWS FAVOUR THE DONALD TRUMPS
26 October 2016
Spokesperson on Finance, Public Expenditure and Reform, and the Arts
Speech by Labour Finance Spokesperson Joan Burton on the 2016 Finance Bill. Key points include:
- Wealthy investors have been able to manipulate our tax laws.
- Corporate tax losses worth €1.24bn lost to Exchequer.
- Accumulated losses of €9 billion in financial sector.
- Minimum effective corporation tax rate required.
- Labour will oppose 6 month amnesty for offshore tax dodgers.
- Clarity needed on start date for Help to Buy.
- Inheritance Tax Loophole should be closed.
- Rather than cut debt to GDP ratio invest in infrastructure.
- Access to lending for home builders critical.
- Rent history should be included in Central Bank mortgage rules.
- Budget does nothing for renters.
What struck me on reading the Finance Bill was the question of what the Irish tax system and Donald Trump have in common?
In our tax system we have built up a very complex structure which allows the Donald Trumps of the world, if they can afford accountants, lawyers and time to interact with the Department of Finance and various other avenues, to develop a system whereby it is perfectly legitimate for people with very high incomes and significant levels of assets and profitable enterprises to effectively avoid, or in the case of tax losses to indefinitely postpone, the payment of due taxes.
I raised this issue during the discussions of the Committee on Budgetary Oversight. We examined a number of elements of the tax code. The State is losing out on billions in tax revenues thanks to the boom time losses, built up by banks and developers that ordinary PAYE taxpayers paid for. They got the country out of the state of collapse that Fianna Fáil, unfortunately, let it fall into.
The Revenue Commissioners have confirmed to me that the financial services and construction sectors managed to avoid €1.24 billion in taxes in 2014, the most recent year for which data is available.
We will have the 2015 data shortly and the Revenue Commissioners and Minister might confirm when we will have those figures. An extraordinary amount of tax losses have built up in our system. We have accumulated losses in all sectors of over €15 billion, in the financial services sector of over €9 billion and in the construction sector of over €400 million.
When a 12.5% rate, or even half of that, is applied, one gets an idea of how it is possible to utilise these losses indefinitely so that people who crashed and were bailed out by taxpayers who covered their losses can still carry losses forward when they return to profitable activity.
They have been able to avail of €1.24 billion in tax not paid in 2014 by utilising the significant losses they accumulated during the property crash to offset tax on the profits they are now recording. This is perfectly legal. It is an arrangement that is entirely within our tax laws.
The construction and financial sectors are sitting on combined losses of over €129 billion.
Major tax losses were built up by companies in sectors, in particular financial institutions that the taxpayer bailed out at enormous expense and sacrifice.
This brings me back to our friend, Mr Trump. People may recall that he has declined, as part of the debate during the US presidential election, to make known his tax returns.
What is known, from various filings, is that he arranged his affairs, arising from tax losses in companies that made such losses, in such a way that it was agreed that for many years, this multi-billionaire in effect paid no tax at all.
Ireland has its own Donald Trumps. We need to be conscious of this when it comes to taxation. We need to look at and examine the matter. We need to get a detailed report from the Revenue Commissioners on it.
My proposal has been and was at the time of the Apple tax debate that we look at introducing a minimum effective tax rate, whereby any profitable company would be forced to pay a certain amount in tax, even where it was carrying massive tax losses from previous years.
Once profits go above a certain level, even though a company has losses, it has to begin to pay at the corporation tax rate on profits above a certain level.
Years ago I got former Deputy Brian Cowen and the late Brian Lenihan to agree to bring forward a minimum effective tax rate on income tax in the tax system.
That is how it works. At a time when we need corporation tax receipts, we can work out a structure that would enable us to ensure capital investment - a particular example is third level education - and what would be more appropriate than the additional taxes garnered from a change in the system that would actually go towards funding and revitalising the third level education sector in terms of capital and current expenditure. Ultimately, that would provide an enormous return for these companies which they are looking for and seeking qualified graduates from the education system to work in their businesses and enterprises.
The Dáil has to discuss the issue of taxation generally. The Committee on Budgetary Oversight was a good exercise in at least starting a detailed conversation on the budget. Globally, the system of taxation is changing and Ireland has to develop a critical plan to have a fair and equitable corporation tax structure, while maintaining, as it is entitled to do, the 12.5% rate. We need an effective minimum corporation tax rate because we cannot have a headline rate of 12.5% which, through various devices, is whittled away to almost nothing.
In the light of the current debate on international tax developments, we will not be able to do this anymore. All of us who have been involved and worked in business, including family businesses, understand that in a business one needs to invest. Capital investment needs to be recognised in the tax code.
We all know that legitimate business expenses need to be recognised in the tax code, but we cannot have a situation where some businesses, either by arrangement or the use of offshore companies and devices, are able to give the two fingers to the rest of us, particularly those in the PAYE system. That does not actually do anything to generate additional enterprise in Ireland.
We know that we need to concentrate on small to medium enterprises, SMEs, and developing employment in indigenous businesses, as well as welcoming foreign direct investment. We have taken some of these approaches to income tax following lots of revelations through the decades and they have been successful.
I urge my colleagues to look at this issue in order to obtain very detailed information on the enormous burden of losses in the tax system.
Section 54 – Tax Amnesty
I recognise the good intentions of the Revenue Commissioners in addressing what has been a very difficult and murky area with which to deal, but, as drafted and constructed, section 54 provides for an amnesty with regard to times and penalties for tax defaulters who are using offshore and overseas tax havens to avoid paying their taxes legitimately due in Ireland.
I know from my professional background that very few people like paying taxes, but they will pay their taxes which are legitimately due to fund the kind of society that provides the education system, the health system and all of the other services that are needed in the public good, yet there is a small but consistent group of people who are operating offshore to avoid paying tax, while others are paying.
In section 54 the implementation date is to be delayed until 1 May 2017. We know that all of the accounting and law firms are constantly in and out of the Department of Finance - we understand this dialogue is important - but the delayed implementation date gives tax defaulters seven months notice, a period in which they can pay up in Ireland or rearrange their financial affairs to stay one step ahead of the tax man and woman.
I thought that the hallmark of Fianna Fáil support for the Government was fairness, but I do not see anything particularly fair about this measure. The Labour Party will seek to bring the date forward to ensure tax defaulters will pay the tax due in the same way that those in the PAYE system have to pay their taxes.
There will have to be very detailed discussions on the proposals made by the Minister to ascertain why he is taking such a softly-softly approach to defaulters with overseas assets and offshore income streams.
We know that numbers of Irish people and firms were referenced in the Panama papers published earlier this year. We also know from previous reports and the tribunals that consistently there have been small but significant numbers of Irish people and firms who have used offshore devices to avoid or mitigate their taxes due.
One can see it when somebody is talking about a business and there is a little footnote on the company being registered in Vanuatu or some other exotic location. You say to yourself, "I wonder what that is about," and it is mostly about avoiding tax.
With the development of the Committee on Budgetary Oversight and other committees, we have an opportunity to look at how we might reform the system in order that people will not cause a scandal and serious loss of revenue to the Exchequer by organising their affairs offshore.
The Revenue Commissioners are going to take very welcome action, but it should be taken as quickly as possible. In its alternative budget the Labour Party proposed a beefing up in the fight against tax defaulters, particularly those using offshore mechanisms. Perhaps Revenue and the Minister for Finance might explain whether the Government has obtained additional access to information in the Panama papers on Irish people and companies’ resident offshore for tax purposes. Revenue might care to share that information with us on Committee Stage.
The Labour Party welcomes the proposals made in the Bill to provide for the payment of tax on property and income held in various property structures, especially real estate investment trusts (REITs).
The public has been extremely upset at the idea, rightly so, that certain vulture funds are able to buy Irish assets cheaply following the crash and have, through various structures, been largely exempt from taxation. This was the subject of detailed discussion and recommendations made by the Committee on Budgetary Oversight prior to the budget. The committee, as well as the finance committee, will want to receive a full account of how the proposals will affect these companies.
It is wrong that we should allow them to continue now that the property market is recovering. In many cases, they will be selling off their interests relatively quickly, that is, looking to flip properties within a three to five year period, because many of them, in effect, are hedge funds. We need to know the Minister's thinking on this and what he sees as the future for some of these vulture funds.
The ones which are long-term property-holding asset companies, which are becoming, if one likes, professional landlords, perhaps owned by pension funds that hold the pension funds of workers, which is a potential development on the Irish property scene about which the Minister has spoken, would be an important part of a serious expansion of the supply of housing in Ireland.
Help to Buy Scheme
We have been critical of the help-to-buy scheme, but I welcome the sensible reduction of the loan-to-value rule from 80% to 70%. If someone is buying a house for €400,000, he or she would have had to take out an 80% mortgage, or €320,000, to qualify for the scheme. It might not sound it to many in this Chamber, but that is a big mortgage. Reducing the loan-to-value requirement to 70% reduces the mortgage required to €280,000. This is still a big mortgage, but psychologically it is below the €300,000 level and so the move is sensible.
I have had correspondence, as I am sure other Deputies have had, from people who were affected by the 80% rule and I think the reduction to 70% will benefit them. Others, however, are affected by the commencement date. I am sure the Minister and his officials are aware that there have been a number of queries about it.
The 19 July refers to the mortgage draw-down date, which is not the same as the date contracts are signed, and my understanding is that the applicable date is the date of draw-down of the first set of funds. Will the Minister clarify the situation?
We must remember that for those buying the house, as anyone would know if they were to go around Dublin at the weekend, the relevant date is also that on which they enter into contracts with builders and suppliers. The Minister estimates this scheme will cost approximately €50 million. Given that the purpose of the proposal is to encourage, help and enable people to buy homes, I would suggest the rules be amended to give the benefit to those buying a home as early as possible. There seems to be an anomaly between those involved in self-builds and those who are buying a home.
Budget 2017 underlines the absolute dependence of the Government on Fianna Fáil. One thing that is extraordinary about the budget is the lack of focus on Brexit. Brexit is probably the biggest challenge to Ireland since the disastrous bank collapse Fianna Fáil presided over and the collapse of the construction industry, and we all know how dreadfully painful and difficult the recovery has been.
We increasingly hear reference to a hard Brexit, but we do not have a person on Mr. Barnier's team yet. The Taoiseach told me yesterday that there were 300 applications or so to work in that section in the Commission. While the Taoiseach was certain a couple of weeks ago that there would be a senior Irish official on that team, he has been unable to say who is that official. It seems from the Taoiseach's reply yesterday that, hopefully, some senior Irish officials will get into the group, but it means that we are very squeezed as a country.
There is a lack of focus on what will happen to small and medium-sized businesses and on the complications for ordinary retail businesses that import from the UK as well as the consequences of the disastrous fall in the value of sterling.
Budget 2017 was predicated on a sterling exchange rate of approximately 85 pence to the euro. We know now that sterling has gone above 90 pence to the euro and is hovering about that at the moment. Given that the budget figures were prepared in that context and the volume of trade between Ireland and the UK, have the numbers been run to account for the change in the value of sterling? The difference could mean big changes for the country.
Tax Avoidance on Inherited Property
I have a question for the Minister and Revenue about tax avoidance by a small group of very rich people whose children can be gifted houses and valuable apartments ranging from €250,000 to €1 million and more. If someone has five or six children, it can be done five or six times. The impact of these transfers is that the child, often an adult child or someone coming into adulthood, is able to avoid inheritance tax and the family is able to avoid any element of gift or capital transfer taxes.
I have spoken to the Minister about this on a number of occasions and he has indicated to me that he has discussed this with Revenue. I understood that he hoped to do something to close off the loophole, which only very wealthy people are able to use, but I do not see it in the legislation and am wondering what happened.
Debt to GDP Ratio
I have previously commented on the Minister's reference to cutting the debt-to-GDP ratio well below the 60% level required by the EU to 45% and the setting aside of a rainy day fund, if the economy allows it, after 2018. The wisdom of that approach, particularly the rainy day fund, has to be questioned.
The country needs a massive upgrade in capital investment. People in urban areas know it and people in rural areas know it just as strongly. The country has been starved of capital investment because of the crash and is now facing the complex challenges of Brexit. It is, therefore, difficult to understand the economic logic of not seeking to bring forward and increase capital investment. However, there is to be a review of the capital investment programme early next year.
It would be useful to get an update on where we are on funding from the European Investment Bank, particularly in critical areas such as education infrastructure and housing. I meet small and large-scale business people frequently. Clearly, the critical thing, which is great from our point of view, for a multinational corporation bringing foreign direct investment to Ireland is that it does not have to draw down or access credit in Ireland.
However, a local small, medium or large business, by and large, has to use Irish banks, unless it is a State organisation, such as the ESB, which can access funds on the international markets.
Small and medium-sized building firms continue to experience serious difficulties in accessing funds when they seek to build a small housing development or apartment block. The banks tell us they are sitting on money which they cannot lend because many of these builders have impaired credit histories. If we do not address this problem, we will not achieve the required level of house building.
A medium-sized building company which wishes to build a small block of 20 apartments needs to access a credit structure that funds the entire development, rather than one or two apartments. Similarly, modern building processes mean services and so forth must all be provided at the same time. As such, a builder seeking to build a small housing development must be certain about having access to a pipeline of significant funding to commence and finish the development, thereby allowing people who are in a position to buy or rent a new home to do so.
Deposit Rules in Dublin
On behalf of the Labour Party, I wrote to the Governor of the Central Bank about the deposit rules for home buyers. I have also spoken to the Minister for Finance, Deputy Michael Noonan, about the issue. Many couples in their late 20s or 30s with two or three children are unable to obtain a mortgage but are paying more to rent a family sized home than they would have to pay for a mortgage. This is particularly true in Dublin.
The Central Bank rules for mortgage lending do not take account of the fact that such couples have been paying large monthly rents for long periods. While the Central Bank rules are correctly focused on ensuring home buyers have the discipline to meet the mortgage commitments they enter into, many families paying large rents are not in a position to save significant amounts. If they were to buy a new home, they would receive some help under the new scheme provided for in the Bill, provided they could find the other element of the deposit.
On the other hand, if they want to buy a second-hand house, as many people do, because they have an established family and their children are attending school in a particular area, they are not eligible for the grant. This is deeply unfair.
The Dáil, collectively, must get the Central Bank to review its rules. If a person has been paying rent for a long period and meeting his or her commitments over two, three or five years, the established practice is to take this into account when considering his or her creditworthiness as part of the loan approval process.
Banks want to know that the person buying a house will meet his or her repayment commitments. There is nothing in the budget for couples who have been paying a large rent for two, three or five years, have children at school and can only buy a second-hand home because the only properties available in the locality are second-hand. This is the case in large parts of Dublin and other large cities.
These young families are the backbone of communities, the people who commit to local schools and facilities. The Dáil, collectively, must have a stronger voice in order that the Central Bank will recognise the social implications of not being able to buy a house and having to rent until retirement age. These issues have not featured in the debate thus far.
It has been the custom in Ireland for generations that people take on a mortgage when they are younger and later use the equity to help their children to make a start when they are young adults.
In simply talking about houses and the construction sector we are at serious risk of overlooking the social impact of the discrimination against renters in the budget. The dilemma faced by people renting has been completely ignored. Some couples who are renting may have two, one and a half or one job between them and want a family home. There will be plenty of scope on Committee Stage to do something for this group of people.