The Government has abandoned attempts to force credit unions to collect tax on dividends paid to their 1.8 million members.
Proposals aimed at ending a three-year standoff on the issue give credit union members the choice of opting out of new arrangements to deduct tax at source on dividend income.
Credit union members will now decide whether to continue to receive their dividends untaxed or have Deposit Income Retention Tax automatically deducted by their credit union. At present it is left to the individual credit union members to pay income tax on dividend income.
Attempts to impose DIRT on credit union dividends in the 1998 Budget led to an embarrassing climbdown by the Minister for Finance, Mr McCreevy, in the face of a revolt by his own backbenchers. A proposal that dividends over £500 be reported to the Revenue Commissioners has also been dropped.
Details of the new deal were circulated to credit unions recently following meetings between Mr McCreevy and the Irish League of Credit Unions.
A thaw in relations between the two sides over the summer coincided with a dip in the Government's popularity.
The Department of Finance is resolving a number of administrative issues and the Minister hopes to announce the new measures in the Budget, according to a spokesman for the ILCU. The ILCU proposes two new credit union savings accounts. Members would be encouraged to transfer savings into these accounts which would attract a higher rate of interest but be subject to DIRT at 20 per cent. Access to the funds would also be restricted.
The first type of account would require members to lock their money up for three years. The first £375 per year of dividend payments would be tax free and the remainder, up to a maximum of £750, would be taxed at 20 per cent.
The second type of special savings account would require the funds to be left on deposit for five years and the first £500 per year of the dividend would be tax free, up to the same maximum of £750. The fourth element of the agreement is that any straightforward deposit accounts held with credit unions will be subjected to DIRT at 20 per cent. Most credit union members, however, have their savings in the form of credit union shares.
Mr McCreevy has also agreed that credit unions will remain exempt from corporation tax. Mr Tony Smyth, ILCU general secretary, added that the Government is confident it can defend the proposals against complaints to the European Commission by other financial institutions.
