Seanad Éireann - Volume 134 - 17 December, 1992
Private Business. - Finance (No. 2) Bill, 1992 [ Certified Money Bill ] : Second and Subsequent Stages.
Question proposed: “That the Bill be now read a Second Time.”
Minister for Finance (Mr. B. Ahern) Bertie Ahern
Minister for Finance (Mr. B. Ahern): When I introduced the No. 1 Finance Bill earlier this year, I announced that a second Bill would be required before year-end to complete the legislative provisions needed to be in place by 1 January next. At the time the election was called  the Government had been on the point of introducing a Bill containing both measures which it was essential to have enacted by year-end, and related provisions. These legislative proposals were published on 13 November. If Oireachtas time had permitted, these legislative proposals would have been brought forward before Christmas. However, because of the very limited Oireachtas time now available, it has been decided to make only those legislative provisions which it is essential should be in force by 1 January 1993, and where retrospective legislation would be unsuitable. These essential measures are contained in the Bill now before the Seanad and in the ministerial regulations which I have made under the European Communities Act, 1972.
The Government's proposals for legislation to be included in a Second Finance Bill contained a number of chapters which provided for the transposition of EC Directives dealing with the structures to apply to excise duties on alcholic drinks, cigarettes and other tobacco products and hydrocarbon oils. Inter alia, these directives define the scope of coverage of these goods for duty purposes and set out those that must be relieved of duty. They also deal with further aspects of the regime governing the control and movement of excise duties in the Internal Market, including rules for controlling the sales of duty free goods to intra-Community travellers; such sales will be permitted to continue until mid-1999. The main framework of this regime is already in place in the Finance Act, 1992.
Failure to transpose these measures into national law could mean that from 1 January 1993 we would be in breach of Community obligations and could give rise to operational difficulties for the Revenue Commissioners. Although the normal practice has been to effect the transposition of important EC measures by way of primary legislation, the time constraints now operating indicated that on this occasion the regulatory framework provided under the European Communities Act, 1972, should be used in order to fulfil our Community obligations.  In the light of the exceptional circumstances outlined, and the essentially technical nature of these indirect tax provisions — which, in the main, will have little practical significance on the ground — I decided to avail of this option rather than include these items in the Bill. I would point out that this mechanism for transposing EC Directives into national law is fully in keeping with the provisions of the Constitution. The regulations have been circulated to Senators and are also available in the Library.
For the reason outlined, the bulk of the Bill before us today is devoted to the completion of the arrangements for taxation of motor vehicles initiated in the Act. A small number of minor but essential items drawn from the proposals put forward in November make up the balance of the Bill. I would like to acknowledge at the outset the co-operation of Members of both Chambers in facilitating the smooth introduction of this vital financial legislation.
Before turning to the detailed provisions of the Bill I would briefly like to review the past year and look at the prospects for 1993. In the budget presented last January, the Exchequer borrowing requirement was projected at £590 million, or 2.4 per cent of GNP. As we are all only too well aware, there has been strong upward pressure on non-capital supply spending this year, particularly on social spending. Despite the corrective action taken by the Government in July following a mid-year review of the likely outturn, it is quite clear that supply spending will be well ahead of target. At the same time, tax revenue should produce a surplus this year, due mainly to a strong corporation tax performance. There are also likely to be savings on central fund services. Taken together, these factors will mitigate the effect on the budget of the supply spending overrun. The eventual 1992 outturn should, overall, represent a creditable budgetary performance in what has been a very difficult year.
In particular, we can take a good deal of satisfaction in the fact that Irish fiscal performance in 1992 should again fall  within the 3 per cent General Government Deficit/GNP ratio specified as one of the primary budgetary convergence criteria and in the draft European Monetary Union Treaty. Steady downward pressure is thus being maintained on the debt/GDP ratio, the other criterion of convergence. This has fallen from almost 117 per cent in 1987 to 94 per cent last year and will again decline in 1992. We should not underrate these achievements which compared very favourably with the likely budgetary performance in other EC member states.
The 1993 outlook presents a difficult challenge. In the absence of a dramatic improvement in the international economy, the budget arithmetic will have to accommodate a further increase in unemployment. Moreover it will have to be framed against the background of limited tax revenue buoyancy — in part a reflection of the otherwise welcome low inflation prospect. In addition, there is a number of particular factors which have negative repercussions on the revenue outlook for 1993.
The inauguration of the Single European Market will involve the elimination of VAT at point of entry in relation to intra-EC trade. This will have an unavoidable adverse impact on cashflow in the VAT area. Proposals for alternative measures to improve VAT cash flow were published in November, but it is not essential to make legislative provision now in that regard since this matter can be addressed in the budget. Even with measures on these lines and taking account of the provision of the Finance Act designed to strengthen the VAT system in preparation for the new challenges it faces, it will be difficult to maintain receipts in this area at the level that would have arisen under the former arrangements. As the House will be aware, capital liberalisation has required the modification of the deposit interest retention tax (DIRT) and significant losses, both definitive and of a cash flow nature, will accrue from these necessary adjustments.
The key consideration in formulating an EBR target for 1993 will, of course,  be to ensure that Ireland continues to act in a way compatible with the budgetary convergence criteria envisaged in the draft European Monetary Union Treaty. Nor should we lose sight of the fact that even if we did not have to take into account the EC parameters, preservation of the domestic and international confidence in economic management, which is crucial to sustainable growth in employment, would point to a similar requirement.
Section 3 makes a few minor, but necessary, technical amendments to the DIRT legislation. These changes are essential to ensure the new DIRT provisions introduced in the Finance Act operate as originally planned. The section ensures that companies opening foreign currency accounts which are DIRT free can only do so on the same basis as for DIRT free Irish currency accounts. In particular, this means that the company will have to supply its tax reference number in its declaration to the bank when it is opening the accounts. Allowing companies hold DIRT free accounts involves a once-off cash flow loss and not an ongoing cost to the Exchequer. Companies will, of course, continue to pay corporation tax at 40 per cent on their interest income.
Section 3 also contains two provisions designed to ensure the operation of the new 10 per cent accounts is not more liberal than originally envisaged. The section prohibits the linking of the special savings account with any other account. This is to avoid a situation where a customer of a bank or building society might open both a special savings account and another account, and arrange to have all or most of the interest paid on the special savings account to avail of the low tax rate on that interest. For example, a deposit taking institution could offer 20 per cent interest on a £50,000 special savings account provided that another £50,000 was left in an account which paid no interest. This section will prohibit such practices. The section also prohibits the holding of special savings accounts in foreign currencies. These measures are to  fulfil the aim of the special savings accounts, namely, to keep money in the country while securing for the Exchequer the best tax yield commensurate with the key requirement.
We have come a very long way since 1987 when the International Financial Services Centre was no more than an idea. Now some 220 projects have been approved to operate from there. These projects have committed themselves to the creation of over 3,000 new jobs and have also contributed substantial employment in the accounting, legal and general services sectors in the Dublin area. Already some 1,200 of the 3,000 new jobs committed have been filled and the Exchequer is receiving the additional bonus of sizeable payments of corporation tax on foot of the profits earned from the international financial activities of IFSC companies. In 1992 the estimated corporation tax yield from IFSC companies is approximately £75 million a very significant and welcome contribution in these difficult times. There is no doubt in my mind but that the centre has been a tremendous success and I look forward to it continuing to grow and contribute to employment creation and economic development in Ireland.
From time to time we need to amend, update or extend legislation to facilitate the development of the centre. We have done so many times over the last five to six years. Today I recommend to the House new provisions designed to ensure that certain companies in the centre can continue to trade there and contribute to its development.
In certain circumstances the giving of tax relief to a company could result in an increase in the overall tax burden, including foreign tax, on the company or its parent such that the company would be unable to continue to trade in the State. To deal with such situations it is proposed that the Minister for Finance may in certain circumstances, by notice in writing, reduce the tax relief to which certain companies trading in the IFSC would be entitled. It is also proposed to cover financial service companies in the Shannon Free Airport zone which find  themselves in similar difficulties. The aim in reducing the tax relief would be to ensure that such companies would be able to continue to trade here and contribute to the development of the IFSC and Shannon zone. In keeping with that objective, it is provided that the Minister may only reduce the relief to the extent that it is necessary to secure a company's continued presence in the State.
The proposed legislation is not specific to any particular country. It would be my intention, however, to use this provision in the immediate future to impose a higher effective rate of tax on certain investment companies in the IFSC which could not otherwise carry on their business in the centre for the reasons I have given. The legislation is flexible enough, nevertheless, to be used in similar situations where it is necessary. The EC Commission was given details of the way we propose to deal with this problem and it has confirmed that it has no objection since a reduction of an existing relief is involved.
This is an important piece of legislation to help the development of the centre. It is needed urgently, otherwise the future of certain companies in the IFSC could be adversely affected. Accordingly, I recommend it to the House.
Part II of the Bill deals with customs and excise measures arising from the completion of the Single Internal Market which must be put in place before 1 January 1993. Part II primarily provides for the balance of the legislation necessary to establish the revised arrangements for the taxation of motor vehicles from that date. The current border controlled excise duty on motor vehicles is being replaced by a vehicle registration tax — VRT — to be administered by the Revenue Commissioners, while road tax will continue to be the responsibility of the local authorities under the Department of the Environment.
The basic framework for the introduction of a vehicle registration tax was included in the Finance Act, 1992. Part II, Chapter 1, of the current Bill — comprising sections 4 to 17 — completes the legislative provisions necessary for the  introduction of the tax and includes measures which reflect detailed discussions with trade interests. The purpose of the Chapter is (i) to specify the rates of VRT to apply to the various categories of vehicles; (ii) to elaborate, clarify and refine a number of definitional and control aspects; (iii) to repeal the existing excise duty provisions; (iv) to provide for a system of temporary registrations; (v) to provide for a system of pre-booking of particular registration numbers; (vi) to provide a system for partial VRT refunds in respect of cars bought by car hire firms, leasing companies and driving schools to compensate them for a reduction in VAT deductibility that arises as a consequence of the revised vehicle taxation arrangements and (vii) to provide for a role for the Revenue Commissioners in relation to road tax enforcement.
I propose now to deal in some detail with the rates issue. In previous statements I have made it clear that the priority for the new tax is that Exchequer revenue from motor vehicles be maintained at the level arising under current arrangements. I also indicated that, in so far as is possible within the constraints of maintaining overall revenue, the aim would also be to leave the price of new cars broadly unchanged.
At the moment, VAT is payable on the price of the vehicle inclusive of excise duty. However, because the new tax will be excluded from the VAT base, the VAT payable will be lower. In order to recover the VAT on the excise element which would otherwise be “lost”, the nominal VRT rate will have to be higher than the nominal excise rate being replaced. A straight conversion of the excise rate of 20 per cent which applies for most private cars — those under 2012 cc — would imply a VRT rate of 24.2 per cent, that is, the equivalent of the current excise charge plus VAT at 21 per cent thereon.
The issue is further complicated because, reflecting Community considerations, rates are set by reference to “Open Market Selling Price” — OMSP — as opposed to the “Recommended  Retail Selling Price” — RRSP — applicable under the current system. While the RRSP is the benchmark for existing excise rates, cars are usually sold for less than the RRSP reflecting the discounts traditionally offered by dealers. These, I understand, average about 8 per cent. The motor distributors, by opting to declare an RRSP sufficiently high to allow scope for discounting, leave themselves liable to “additional” duty on the amount of the discount built into the RRSP. Although distributors have always been free to declare RRSPs which are closer to the actual selling price and thereby mitigate part of the tax charge, they have almost invariably chosen not to do so; this is presumably because they considered the higher tax charge incurred as being outweighed by the advantage of being able to offer a higher nominal discount to customers.
Under the new system, the VRT charge on an individual car will be determined by the application of the VRT rates set out in this Bill to the OMSP as declared by the distributor. If all distributors declared OMSPs which are either identical to their existing RRSPs or reflect a uniform level of discounts, it would be a straightforward matter to set rates that would meet both my stated objectives. However, the evidence to date indicates that distributors may adopt different practices in terms of discounting existing RRSPs.
This gives rise to difficulty in that, to the extent that distributors adopt different rates of discounting in their declarations of OMSP to the Revenue Commissioners, it creates a clear and unavoidable conflict between the objective of maintaining overall revenue and the desire not to disturb prices. The VRT rate that would maintain revenue from the section of the market where OMSPs were set at RRSP — or close to it — would be too low to maintain the tax yield from the rest of the market where RRSPs were discounted. Conversely, the rate that would be needed to maintain revenue in the section of the market where RRSPs were discounted would  result in an increased tax charge on the remainder — with consequently higher prices.
If distributors adopt different approaches to declaring OMSPs it would be simply impossible to reconcile the objective of maintaining revenue with the achievement of price neutrality in all cases, given that a single rate of VRT must apply to all models in a particular category. While a VRT rate that would ensure that no car increases in price is a theoretical possibility, it would expose the Exchequer to a substantial and, therefore, unacceptable loss of revenue. Given that budgetary considerations, especially in the difficult circumstances of 1993, dictate that revenues must be maintained, I have decided that the best approach is to set the rate by reference to RRSPs discounted by 6 per cent i.e. slightly less than the current industry average. This approach will secure the bulk of existing revenue and should also obviate, in most cases, the need for price increases. Furthermore, the rate proposed enables those distributors who finally declare OMSPs reflecting discounts of more than 6 per cent to reduce price slightly. On this basis, the rate applicable to private cars not exceeding 2012 cc will be 25.75 per cent; while for larger cars, the rate will be 31.8 per cent — the current excise duty rate for this latter category is 24.7 per cent.
I am satisfied that the new rating arrangements will not lead to higher car prices generally or create legitimate pressures for such increases. In fact, distributors representing at least 70 per cent of the car market have already indicated that they will be declaring OMSPs reflecting at least 6 per cent discounts; in most of these cases, the total tax charge will be reduced. Moreover, it remains open to most, if not all, other distributors to adopt a similar approach and thereby avoid price increases.
In setting the rate for those vans derived form cars or jeeps, which are currently liable to excise at a rate of 12.5 per cent, I am taking the same broad approach. However, in recognition of the fact that VAT-registered purchasers  account for the bulk of this segment of the market, I propose to ensure that they are not disadvantaged by virtue of the new arrangements. The make-up of the total tax charge as between VAT and excise/VRT is altered, with the VAT element being reduced. The VRT, unlike VAT, is not reclaimable. Thus, since the effect of maintaining the total tax charge constant would be to increase the cost to VAT-registered purchasers, the VRT rate of 13.3 per cent, which I am proposing for these vehicles, will leave the net tax burden unchanged for business purchasers. Furthermore, this rate should facilitate a reduction in the retail price of the vehicles concerned for private customers.
In the case of both private cars and vans derived from cars and jeeps, I am providing for a minimum VRT charge of £100.
For motorcyles, the Bill provides for the replication of the existing system as far as possible. As with cars, the nominal VRT rates will have to be higher than the nominal excise rates being replaced, to recover the VAT being lost as a consequence of the exclusion of the new tax from the VAT base. The rates now being proposed in that context are £2.50 per cc for the first 350 ccs and £1.25 per cc thereafter.
Vehicles such as trucks, lorries and dumpers, which are currently exempt from excise duty but liable to a £40 administrative registration charge payable to local authorities, will be liable to an equivalent flat-rate registration tax.
Vehicles such as fire engines and ambulances, which are currently exempt from both excise duty and the present administrative registration charge, will not be liable to any VRT charge.
The new arrangements would, in the absence of offsetting action, reduce the amount of tax deductible for those businesses entitled to a VAT deduction in respect of cars and would thus increase their net costs. The businesses concerned are car hire, car leasing and driving schools. In order to leave their tax burden unchanged, I am providing in section 10 for partial refunds of VRT as required.
 In section 7 I am enabling the Revenue Commissioners to establish a facility for the reservation of particular registration numbers with a significance to car owners. Numbers which would appear in the normal registration sequence may be booked in advance for a fee; there is no question of concocting numbers. The section also allows the Revenue Commissioners to establish a register of vehicles of persons visiting the State, where temporary registration is required. This facility replicates an existing system and typically applies in situations where, for example, a person is temporarily resident in the State and is, for whatever reason, unable to display their domestic registration plates.
It is envisaged that, as part of their function in enforcing the new vehicle registration tax, officers of the Revenue Commissioners would also have a role in relation to the enforcement of road tax. These powers will be similar to those already possessed by traffic wardens in relation to road tax. As regards enforcement of the VRT, I should explain that section 142 of the Finance Act, 1992, already provides that uniformed Revenue officers can stop a vehicle, examine it and require information concerning the vehicle to be furnished. That section also gives detention and seizure powers to Revenue officers in respect of vehicles for the purposes of enforcement of VRT. Officers of the Revenue Commissioners will be specially authorised and trained for this purpose.
Section 15 has two limited objectives. The first is to grant to members of the Garda Síochána the same powers in relation to detention of vehicles as are available to Revenue officers in the context of VRT.
Similarly, the second objective is to give to duly authorised Revenue officers the same necessary powers as the Garda have for the enforcement of road tax. It is intended that these latter powers will be exercised where Revenue officers, in the course of VRT or registration inquiries, come across cases of road tax offences. I wish to repeat the assurances that I gave in the Dáil yesterday that  consultations will be completed with the Garda and the Department of Justice before this new role for Revenue officers in relation to road tax is put into operation and that the Oireachtas will be advised of the arrangements.
The Government's proposals for legislation to be included in a second Finance Bill, published on 13 November 1992, also contained a number of measures relating to vehicle licensing i.e. road tax. Chapter II of this Bill, comprising sections 18 to 23, provides for those amendments to the road tax regime that are specifically necessitated by the introduction of the vehicle registration tax.
Under the revised taxation arrangements, vehicle registration will be administered by the Revenue Commissioners. Road tax will continue to be a matter for the local authorities under the Department of the Environment. Production of a registration certificate, which will be issued by the Revenue Commissioners, will, in future, be a pre-condition for obtaining a road tax disc. Thus, it will no longer be feasible to simultaneously complete registration and first licensing of a vehicle. In recognition of that situation, section 20 will permit, by way of a good defence mechanism, that a motorist will not be penalised for the use of an unlicensed vehicle provided a licence is obtained within seven working days of registration; this will give the motorist sufficient time, following registration, in which to license a vehicle. To take account of the foregoing provision, the section also provides that a licence shall be due from date of registration, as opposed to date of first use as applies under present arrangements. Finally, the section will allow a surcharge to be imposed on arrears of road tax to encourage motorists to obtain licences on time in the case of both first licensing and renewals.
Trade licences have long been available to the members of the motor trade to enable them use unlicensed vehicles in public in the course of their business — for example for test driving new vehicles. Provision is being made, in section 21,  for the continuation of a trade licence system under the new arrangements. However, it is necessary to recast the system in the light of its enhanced importance in the new regime, where it will form part of the control arrangements, not alone for road tax but also for VRT. The revisions made should ensure that the system is not abused.
As recovery vehicles, e.g. tow-trucks, will no longer be permitted to operate using trade licences and will, therefore, require a road tax disc, provision is made in section 22 for the application of an existing road tax rate to such vehicles.
Section 23 provides for the repeal of provisions relating to the small administrative registration charge which applied under the system now being replaced.
I explained at the outset why I had, after careful consideration, concluded that the regulatory route was appropriate in these circumstances to transpose the EC Directives.
Further regulations will need to be made by the Revenue Commissioners to give detailed, on the ground, effect to the regulations made by me under the European Communities Act, 1972 and, as the power to do so cannot be provided for by way of regulations, provision is included in section 25 for such powers. Similarly, it has been necessary to provide, in the Bill, for the creation of certain penalties and offences to back up the provisions in the ministerial regulations and this is done in sections 26 and 27.
Before I leave this matter, I wish to stress that neither these regulations nor the Bill deal with actual rates of duty which member states are obliged to respect from 1 January 1993. In practically all cases, our rates of duty already comply with the relevant provisions. The exceptions include the duty on heavy fuel oil and the duties on tobacco products. It is considered preferable to deal with the action required as regards rates as part of the normal budgetary process, rather than by way of regulation, even though this course of action means that we will technically be in breach of our  EC obligations in the period between 1 January and budget day.
I would also draw the attention of Senators to the fact that similar regulations will have to be made to complete the VAT arrangements for the Single Market. The ECOFIN Council adopted the outstanding technical measures on Monday last and these will have to be transposed into national law as a priority. I can assure Senators that these regulations will be wholly technical and will not impinge on the more substantive issue of rates of VAT.
Section 28 provides for the abolition of the 3 per cent levy on investments in life assurance products and collective investment undertakings, with effect from a date to be set by ministerial order. As the House is aware, during the discussions on the new DIRT provisions in the Finance Bill in May, I undertook to hold discussions with the life assurance companies and others in the financial services industry to consider the impact of the revised DIRT arrangements on the provision of equity finance to Irish industry. Following these discussions, I put forward my proposals for changes in this area in the draft legislation published in November. These proposals include the introduction of special investment accounts and a change in the taxation arrangements for life assurance products in general. Both sets of provisions involve the abolition of the three per cent levy.
The special investment accounts were to be operative from the date of capital liberalisation and the new tax arrangements for general life assurance from the first of January 1993. To delay the introduction of the special investment accounts until significantly later than the special saving accounts could have serious implications for their successful launch. However, because of the method of collecting tax from such investment products, it is not essential that all the provisions relating to changes in their taxation arrangements be enacted now. Many of them can wait until the next Finance Bill.
In contrast to other taxes on such investments, action needs to be taken  now in regard to the 3 per cent levy. This is because this levy is an upfront charge paid by the investor when the investment is made initially. It would be very difficult to abolish it retrospectively. Therefore it is proposed to provide for its abolition, but to give the Minister for Finance power to give effect to this by Order. This will facilitate the new Government in introducing the proposed special investment accounts at the same time as special savings accounts, should they wish to do so. It will also facilitate the new Government in introducing a new general regime for life assurance companies from 1 January next should they so decide. The final decisions will, of course remain to be taken by the new Government. While the other necessary provisions can be included in the 1993 Finance Bill with retrospective effect, an earlier statement of the Government's intent will be necessary if the special investment accounts are to be introduced at the same time as the special savings accounts.
I commend the Bill to the Senate.
I wish to thank the House for sitting specially today to deal with these Bills.
Mr. Staunton Mr. Staunton
Mr. Staunton: I should like to contribute to this debate. I was critical of the Minister's absence before he arrived. I would like to retract that criticism. I understand he was involved in the Government formation negotiations. I should like to welcome him to the House. I respect the fact that he has come here to address us in relation to this issue.
This Bill is before us at a very strange time, for the fundamental reason that a general election took place at a very strange time. Had that general election not occurred at that time we would not have had this piecemeal dealing with these financial Bills and Resolutions. That general election was called at a time of great instability in money markets here exacerbated by problems in relation to the appointment of a new Irish European Commissioner which was not announced until today and which might, more appropriately, have been announced earlier.
In relation to the specific provisions of  this Bill or those not included I should say there was a report in The Irish Times some time ago claiming that a large range of new taxes to encourage industrial investment were put on hold because the second Finance Bill had to be abandoned a week before it was due to be published because of the events to which I have already referred.
The Minister spoke about a number of technical issues. Taking the latter, smaller items, some of which have to do with European Community legislation with which we are dealing, I have often taken the view that we have very inadequate control, at a political level, of regulations being adopted by the European Community. I do not think that the Joint Committee on the Secondary Legislation of the European Communities, established in 1973, of which I was a founder Member, deals adequately with the relevant legislation because they really deal with retrospective legislation and retrospective issues in respect of which it can have no input and absolutely no influence. Many of us in this and the other House have been screaming for some time for the establishment of a joint foreign affairs committee which is very pertinent because of our membership of the European Community, our involvement in the United Nations, in events happening in other regions such as Bosnia and elsewhere. From my point of view the European Community issue is of paramount importance because of the so-called importance of the Joint Committee on the Secondary Legislation of the EC. Therefore a joint foreign affairs committe could deal in a much more aggressive manner with many such issues concerning, for example, policies on hydro-carbon tax, policies on the overall green environmental sector throughout Europe today; with regulations in relation to all kinds of piecemeal projects nationwide which are sprung on tradesmen, business men or professional people in circumstances in which there has not been an adequate forewarning system. Fire brigade action has to be taken to attempt to change something  retrospectively. That is not satisfactory. Therefore, the Minister and Government would be assisted if such a foreign affairs committee — which was to be established some time ago — were established fairly soon. Indeed that should be one of the first tasks of the new administration to establish such a foreign affairs committee.
In relation to the specifics with which the Minister has dealt at great length, again due to the impending Single Market issue and the deadline, there is a necessity to introduce new measures into our laws. Otherwise we would be in breach of EC obligations, resulting in operational difficulties for the Revenue Commissioners. A major one, apparently, is this issue of vehicle registration tax — otherwise known as VRT — replacing excise duty. Value added tax had been charged on the recommended retail prices of cars, including excise duty. The Minister, his Department and advisers estimate that the open market average selling price is 8 per cent less than recommended retail prices so that VRT is to be charged on recommended prices, less 6 per cent. This arbitrary choosing is causing disquiet within the motor trade. Many people have difficulty in understanding how that 8 per cent was arrived at. For example, there are different makes of cars, different margins for garages. In some cases, one is talking about less than 8 per cent while, in others, probably significantly more. But the arbitrary choosing of this 6 per cent is not regarded as satisfactory. In so far as the consumer is concerned — in other words the taxpayer — many take the view that the provisions of this Bill load the balance very much more in favour of the Government and Revenue Commissioners, than of the consumer, that they have gone a bit too far. That is the only comment I wanted to make specifically but I am not a technocrat.
As an aside — this is in no sense a criticism of the Minister or the Government and it is not pertinent to the Finance Bill — one of the disappointments of European Community membership is the big mystery about car sale prices. The  ordinary punter had expected that, at a certain time, there would be a levelling off of car prices, merely allowing for transportation factors. Of course that has not happened. There are huge disparities obtaining — practically 20 years after our entry into the European Community — between the retail prices of cars among the various member states. This country would have one of the highest in that regard.
The Minister dealt with the issue of DIRT tax. DIRT is a very simple name. I think many people around the country do not really know what the initials represent; they use them without understanding their representation. It is, of course, deposit interest retention tax. We can see the Minister's direction here because, with the abolition of foreign exchange controls, the opportunity for Irish investors to invest in other countries, with a competitive market in banks and other institutional investment circles, there is the danger that there would be substantial outflows of money from Ireland. Obviously our national interest must be protected by addressing that issue or possibility. Therefore this Bill is necessary to give the Minister and his departmental advisers some powers in relation to capital movements.
However, it is not as simple as that because, as we acknowledged, this second Finance Bill had been signalled long before the present Bill was published and there were numerous statements in relation to this DIRT issue. There have been a substantial number of comments in national journals, by professionals in the financial, business and industrial sectors about DIRT tax and the proposed reduction by the Minister from 27 per cent to 10 per cent. While appreciating the reasons for this change, it has been pointed out in the media, and no doubt to the Minister in representations, that this can have a very drastic and negative effect as far as the Government's programme to create employment is concerned.
We spoke earlier, on the Appropriation Bill, about the fact that the single most critical and pressing issue in this  country today is that, despite relative stability, 300,000 people are unemployed. There is great dissatisfaction at the extremely low level of jobs being created, especially in manufacturing industry.
If one looks at this financial services sector, whether at banks, insurance companies or trustee savings banks, this massive reduction in the deposit interest retention tax is greatly reducing any incentive for people to invest in areas of medium to high risk. If one can invest in virtually risk free enterprises at an extremely low tax rate on deposit interest where on earth is the incentive to invest in the industrial sector? Apart from that and despite all the speeches by Ministers and by chairmen of national banking groups it is a fact of life that if one attempts to raise funds today for employment creating projects in the industrial sector it is virtually impossible to negotiate these funds from commercial outlets. That includes State banks, such as the Industrial Credit Company. The raison d'être of the Industrial Credit Company in the Lemass years was that it was to be an arm of Government to fund industry. The role of the bank has changed completely. It has moved into the commercial arena and into financing property in Dublin, sweet shops, shoe stores and so on.
As evidenced by its title, the Industrial Credit Company, its obvious intention was to fund industrial development. The Industrial Credit Company today is in the same business as the other commercial banks, that is, the retail trading and property sectors and there is a diminished will to get into this prime area where the State is starved for development. Development cannot happen and jobs cannot be created unless there is investment. Unless loan funding, independent of grant funding and equity funding, is available as sure as day follows night, the show cannot be put on the road and jobs cannot be created.
The position is the same as far as equity funding is concerned. It is extraordinarily difficult to raise equity funding in this country and this is retarding investment.  In some cases it is easier to seek equity funds outside this country than in the city of Dublin today because of reluctance to get into this area. One of the very damaging effects in this new DIRT legislation is that it encourages investors to move their funds into risk free areas, and this is acting as a huge disincentive to people to invest in the high risk areas where jobs can be created.
In an article in The Irish Times of Tuesday, 24 November, a tax partner in a major chartered accountants company sought a pledge from political parties forming a Government, to review the impact of tax legislation on the jobs markets. If tax legislation is being stacked against incentives for people in business and the manufacturing industry, if people are being encouraged to withdraw funds as dividends without tax, if the brakes are put on employee participation, or if people are being encouraged to put investment in deposit accounts rather than in active areas, all this will nullify the stated objective of the Government in the sector.
In the IDA Mr. Kieran McGowan, the chief executive, has for some time been calling for more investment funds to be targeted for industry. That is not happening. The Culliton report was welcomed with a fanfare. This incentive is flying in the face of what Culliton recommended, because that increased flow of funds into the deposit area will encourage people to invest in safe enterprises, such as property, rather than in venture capital. In terms of industrial investment the Culliton report has identified a shortage of seed capital, or venture capital, as a major problem facing Irish entrepreneurs. A commentator recently stated that if the country is to develop a strong and vibrant indigenous industrial base, the Minister will have to consider some form of fiscal incentives to encourage institutions and private investors to provide risk capital for new and developing industries.
There has been speculation about the BES fund — whether it was intended to be part of the original Finance (No. 2)  Bill. It was stated that it was the Government's intention to abolish the £75,000 cap on investments which had been enshrined in the legislation. I am glad to see the Minister nodding. I would like him if possible to comment briefly on the BES fund and whether he belives there should be an increase in the amount of funding into an individual industrial project, and what plans or vision he has for the continuation of that fund.
Mr. B. Ahern Mr. B. Ahern
Mr. B. Ahern: In case I do not get an opportunity to reply, I have set out the Government's revised proposals in the White Paper of 13 November. I will arrange to get a copy for the Senator.
Mr. Staunton Mr. Staunton
Mr. Staunton: Was it on 13 November?
Mr. B. Ahern Mr. B. Ahern
Mr. B. Ahern: Yes. I could not publish the legislation because of the collapse of the other House.
Mr. Staunton Mr. Staunton
Mr. Staunton: I appreciate that.
One commentator said that the new DIRT accounts are out of line with Culliton for two reasons. They are a further ad hoc measure introduced in response to fears of money flowing out of the country after January and they use the tax system to discourage risk taking investment in industry. Despite apparent agreement on the need for a thorough reform of the tax system, the Culliton report concludes that successful rearguard action by the interest groups surrounding each specific relief lies behind the lack of action in tax reform. He also said that the Government will have to break through the myopia of specific interest groups and take the hard political decisions and decisive action needed to achieve a thorough reform of the taxation system.
In essence, this is an as hoc measure which looked at the requirement for 1 January, and at the scope for investment outside the country. The natural instinct was to protect that investment and retain it within Ireland. Since the superficial view is that we must adopt a fire brigade rearguard action to stop this, we dropped the tax rate from 27 per cent to 10 per cent. In isolation this can be very damaging  if we are to create an incentive for investment in the critical areas that create jobs. We should not do this in isolation. It should be part of a broader package where under other headings there are substantial incentives to get the funds flowing into the areas we are speaking about. I welcome the Minister's comments about the business expansion scheme. I look forward to receiving a copy of the White Paper and would welcome his further comments in relation to the BES.
Mr. Farrell Mr. Farrell
Mr. Farrell: At the outset I pay tribute to the Minister for the excellent work he has done as Minister for Finance. It is easy to lose sight of the achievements in the economic management of the country. During the years 1987 to 1989 we improved the economic situation from a deplorable level of debt. Predictions for economic growth in OECD countries are of the level of 2 per cent next year — for this country it is 2.75 per cent — an inflation rate of less than 3 per cent. Despite all the undoubted strains put on public spending this year in the areas of social welfare and health, the Minister has been able to maintain the debt-GDP ratio at the levels required for European Monetary Union convergence and he has also maintained the Exchequer borrowing requirement. These are remarkable achievements by the Government in the light of the prevailing economic circumstances.
In relation to the unemployment problem we must remember that we are in the midst of one of the deepest international recessions we have ever had, and that the other countries, too, are enduring serious employment problems. However, we cannot ignore these difficulties. The Government has taken relentless action in the area of unemployment. The Taoiseach initiated the county enterprise schemes. In regard to a point made by Senator Staunton concerning the need for investment equity, nowhere is the Government's commitment more marked than in that area. Money has been put up front by banks and other lending institutions, through the county  enterprise schemes, to local enterprise for the start up of projects and particularly for job creating projects. All of these are specific initiatives undertaken by the Government to tackle the unemployment problem.
All the fundamentals of the economy have been maintained at an acceptable level. All independent commentators have acknowledged the good housekeeping and good financial management undertaken by this Government. This means that when the economic upturn takes place — that will be assisted by the GAAT negotiations by Commissioner Ray MacSharry — we will be well poised to take advantage of all the benefits which have derived from sound management of the economy.
I commend the Minister for the provisions contained in the Bill. In regard to the DIRT provisions there is a large number of people in Ireland with small savings who depend on the interest derived from those savings to give them a basic level of income. They appreciate very much the provisions made by the Minister in this area.
The Minister has made very important changes in relation to the financial services centre at Shannon. These give the Minister flexibility to ensure that the jobs created in that centre are maintained and that the commitment to 3,000 jobs can be achieved. This is a remarkable tribute to the Fianna Fáil Government which had the initiative to set up the financial services centre when the cynics and the critics had so much to say about the feasibility of the project. They have been proved wrong not only in that respect but in many other instances, too.
In relation to vehicle registration tax, the Minister has struck a balanced deal in relation to a complex and difficult issue. It is living in cloud cuckooland to say we could have foregone the revenue which hitherto was taken under excise duty, that it would simply be lost to the Revenue and would not be replaced. The Minister has had to tackle the issue to maintain the level of tax revenue and he has done so in a sensitive and balanced way and in full consultation with the  industry. So far as I am aware the industry is relatively happy with the manner in which he has approached this matter.
I am happy to note the Minister has addressed the issue of car hire companies so that revenue wise the effect on these companies would be neutral. This is an important area in relation to tourism, we do not want to impose additional costs in that area.
In regard to job creation, an issue referred to by Senator Staunton, I welcome the fact that the Minister is proposing, in the not too distant future, to abolish the 3 per cent levy on life assurance and investment products. This is further evidence of the Government's commitment to create the kind of equity investment and venture capital which is so necessary for enterprise, investment and jobs.
In conclusion I should like to welcome the appointment of the Minister for Justice, Deputy Pádraig Flynn, as European Commissioner. I am delighted with his appointment, I am confident he will follow in the tradition of the Commissioners we have had in recent years and that he will play an excellent role in Europe on behalf of Ireland and of the Community as a whole.
Mrs. Bennett Mrs. Bennett
Mrs. Bennett: I will be very brief as I did not intend speaking on this Bill. I should like to respond to something which was said earlier in the House today by the Minister of State at the Department of Finance, Deputy Treacy, when speaking on the Appropriation Bill, said:
In spite of the predictions earlier in the year, new car sales were down by only 1.25 per cent as of the end-September and are expected to show a decline of about the same order for the full year.
Is it acceptable to the Minister that the motor industry is going through one of its worse crises in many years? Sometimes we forget, in our anxiety to balance the finances exactly, the contribution of the motor industry to our economy, to employment and to the social life of the  country. It sometimes appears as if the Departments of State are in conflict with the motor industry rather than using it is a vehicle — no pun intended — to generate employment and to accelerate the economy.
Let us get some facts straight. The motor industry, with motorists, contribute about £1.2 billion to the Irish economy every year. This is as much if not more than we hope to get from Maastricht. There are more than 25,000 people employed in the industry. It is a sector that realises the demands for Government revenue and it also wishes the Minister to recognise that it cannot trade continually with its hands tied behind its back, in an extremely heavy tax regime.
I would ask the Minister to reduce vehicle registration tax on cars by way of compensation for the UK's complete abolition of duty. We cannot expect the homebased motor industry to compete with such a high level of taxation. Over 60 per cent of car sales in Ireland are to the corporate sector. The high level of benefit-in-kind tax in Ireland will decimate this sector of sales and consequently employment.
During our four year period a business person with a company car would pay tax on 120 per cent of the original cost of the car which is made up of 40 per cent taxation.
In 1981 when over 100,000 cars were sold there were approximately 24,000 people employed in the retail side of the motor industry alone. Ten years later the burden of taxation on cars and the benefit-in-kind taxes have reduced the number of cars sold to 65,000 and employment in this sector of the motor industry has reduced to 15,000. The irony of the whole situation is that a reduced level of taxation would stimulate demand and result in increased revenue to the Government. Let us have some commonsense and put jobs before theory. By insisting on the ridiculously high level of benefit-in-kind tax we will force a reduction in car sales to the corporate sector, reduce employment substantially  and thereby reduce Government revenue.
On a happier note I thank the Minister for reducing the cost of the trade based industry from the high figure which was published in earlier proposals.
An Cathaoirleach An Cathaoirleach
An Cathaoirleach: As no other Senator is offering I call on the Minister to conclude.
Minister for Finance (Mr. B. Ahern) Bertie Ahern
Minister for Finance (Mr. B. Ahern): In relation to how the 6 per cent was arrived at in calculating the rate, 50 per cent of distributors have indicated they will declare prices to Revenue 8 per cent below the existing retail sales price. A rate based on 6 per cent reflects this pattern which many other distributors are now following while still leaving a safety margin for those few cases where discounting to that level would not be possible. I thank Senator Staunton for his remarks in relation to the Bill and note his points about the DIRT tax. It is a changed position. As I said yesterday in the other House the matter will be kept under constant review.
Senator Staunton asked for some details regarding the proposed changes in the business expansion scheme. It is proposed to renew the scheme for a further three years up to 5 April 1996 in recognition of the concerns expressed about access to equity capital for start-up and developing companies. It is also proposed to abolish the lifetime cap for individual investors, which is currently £75,000 which would limit the availability of funds to companies under the business expansion scheme. This, in conjunction with the annual limit of £25,000, which it is proposed to maintain at the current level, will allow individuals to make tax relief investments of up to a further £75,000 over the next three years. In order to ensure the scheme's current focus on economic sectors and on firms which are both at risk and offer the prospect of extra sustainable output in jobs, it is proposed not to alter the company limit which will remain at £500,000. These changes will certainly help those  people who tend to use the scheme to invest. Many of them have reached the maximum of their lifetime limit and it is only correct that we should allow them the scope to make further investments if they wish.
I thank Senators Farrell and Bennett for their supportive remarks. I know the motor trade has been experiencing difficulties for a few years. However, it is not the only sector; most industries in most countries are experiencing difficulties. When I was in Edinburgh last week my German colleague told me that three years ago a person would have to wait for up to six months for a new Mercedes but that the Mercedes plant is now operating only three days a week and 30,000 Mercedes are sitting in the factory car park. This is an indication of what is happening in other countries.
As Senator Bennett said, car tax rates were reduced in the 1992 budget. This is important for the industry. Senator Bennett has been an outspoken supporter of the industry for many years and has tried to get a better deal for it. This is only right as it is a big employer and a very important industry. I will continue to keep this industry under review to see what way we can assist it in surviving and enabling it to grow when the economic climate improves.
Question put and agreed to.
Bill put through Committee, reported without recommendation, received for final consideration and ordered to be returned to the Dáil.
Seanad Éireann 134 Private Business. Finance (No. 2) Bill, 1992 [ Certified Money Bill ] : Second and Subsequent Stages.