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Thursday, 18th April 2024
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As the economy moves into a downturn, the attitude in the media, and in some official circles to the business community has become rather hostile. The tone of public debate, if one can so characterise some references to the business community and taxation in newspapers and radio talk shows, has developed a shrill edge.
Relief or loophole?
Is the Minister for Finance cueing the media, or is he taking his cue from the media, in the use of the ‘loophole’ word? Over the last few months the closing down or phasing out of routine tax reliefs has been described both by the Minister and by the media in terms of loopholes being clamped down on.

What is a loophole?
Most people would believe that a loophole is a provision in tax law which a cunning taxpayer uses to obtain a relief which neither the Oireachtas nor the Revenue nor the Minister for Finance anticipated they would be able to obtain from that particular provision. It has about it a connotation that trickery was involved in obtaining the relief.

Both the Minister and the media have seen fit to characterise the sale of a building attracting capital allowances by a company to an individual as a loophole, and the claiming of interest relief by an individual on borrowed moneys used to invest in an Irish rental income company, where the company was entitled to capital allowances on a building, as loopholes. In what sense are they loopholes? Where an individual purchases from a company a building attracting capital allowances, the individual is entitled to those allowances as a straightforward application of the law in the manner in which it has been understood for about half a century. It is precisely the relief the legislation was intended to provide. So where is the loophole? Where is the trickery? Where is the unintended benefit?

Similarly interest relief on borrowings to invest in an Irish rental income company have been available to an individual for almost 30 years. The legislation is very specific about providing such relief. It is precisely the relief that the legislation intends to provide. It is available only if the individual finds resources with which to pay the interest – something that typically involves him in creating taxable income. Once again, how can a tax relief operating in precisely the manner it was designed to operate, and in the manner it has operated for over a quarter of a century, be converted by a newspaper headline into a loophole requiring instant action by a Minister?

High earners
Throughout the last year much play has been made by the media, and by the Minister, of a Revenue report that is alleged to demonstrate that many high earners avail of tax reliefs to substantially reduce their tax liabilities. The tone of the reaction has been one of shock, surprise, and horror. The Minister has reacted by restricting numerous reliefs, or phasing them out.

There is nothing wrong with the Minister restricting reliefs, or phasing out reliefs, where in his judgement the relief is no longer worth the cost to the exchequer. But surely it is disingenuous to do so on the basis of surprise that the consequence of using the relief is to reduce the tax liabilities of a high earner. Who else did the Minister ever anticipate would avail of reliefs that are dependent on investment of large sums of money in risky projects? When these reliefs were designed by the Department of Finance, are we to suppose that they were designed primarily for use by standard rate taxpayers, or by those dependent on Social Welfare? Who is it the Minister expected to finance hotels, wind farms, urban renewal projects and the like? Those with neither capital nor income, or those with substantial capital and high income?

It is not a question of the Minister being wrong to restrict reliefs. What is dangerous is the public spin put on his actions which suggests that there is something inherently wrong about being a high earner and inherently wrong about a high earner availing of tax reliefs which were deliberately provided by the Oireachtas for high earners.

Confusion and hostility
There have been other strands of debate in recent times which indicate hostility towards a business, and confusion in thinking. In the D?il, an opposition spokesman has expressed alarm that financial institutions should be able to obtain capital allowances on plant used in their leasing trades. Without such capital allowances there would be no leasing trade. Without leasing trades it is fair to say that Dublin’s international financial services centre would face a bleak future. It has other spokes to its wheel, but how many spokes can you remove before a wheel collapses?

What is more worrying is that this comment was made by a party nominated spokesperson during a debate on a Finance Bill. One would assume that a party nominated spokesperson on a particular topic such as taxation would have knowledge of the topic. There is little point striving to have a world class international financial services centre if the legislative environment for it is created by village class legislators.

The reintroduced bank levy is hardly the type of development that is supportive of an international financial services centre. It is a simple smash and grab raid on a part of the business sector which has had a bad press with the general community. If unpopular minority sections of the community can be arbitrarily raided in this fashion, is Ireland a safe place for a financial services centre? Short-term solutions to budgetary problems can have long-term consequences which may not have been intended.

It is now some five years since a deal was done with the EU for the introduction of the 12.5p.c. corporation tax rate, and the phasing out of the 10p.c. rate. For a large swathe of Irish industry and business the 12.5p.c. corporation tax rate represents an increase in their tax rate by a factor of one quarter. Despite this for the last five years we have seen successive restrictions of tax reliefs for business, and additional impositions on business, all justified on the basis that the tax reduction represented by the 12.5p.c. tax rate had to be clawed back in some fashion. At no time does the penny seem to have dropped that the 12.5p.c. corporation tax rate is not an across the board rate reduction. Some companies are experiencing a rate reduction. Very many others are facing a rate increase. The thinking in this area is highly confused.

The introduction of the 12.5p.c. rate in place of the previous 10p.c. rate represented a major restructuring of our tax system. It did not come out of the blue. Surely it would have been possible to consider what changes in the tax system were needed or considered desirable in consequence, and to have these introduced as a single package? Instead of this there has been a continual drip of new measures, justified by reference to an alleged reduction in corporation tax rates, and potentially affecting all businesses, including those whose rates have increased and including unincorporated businesses which can derive no benefit from a reduction in the standard rate of corporation tax.

More disturbing, there is no confidence that this process of placing additional burdens on the business community under the general justification of the 12.5p.c. corporation tax rate, is at an end. Ireland’s favourable tax regime for inward investment has been based not only on low tax rates, but also on a stable tax regime. Our attractions are reduced if businesses cannot be reasonably certain of the fundamentals of a tax regime from year to year. It is desirable that the Minister for Finance should indicate that this programme of alleged claw backs is now at an end.

Does it all matter?
If debates on taxation appear to be based on the proposition that those who create jobs are in some sense less worthy than those who occupy them, and that those who create wealth and possess wealth are less reputable than those dependent on the State for a living, the atmosphere will not be conducive to the development of a vibrant indigenous economy. It is important that the public service, and Ministers, should not seek easy headlines in tabloids by populist comments on ‘closing loopholes’, when all they are engaged in is reviewing the desirability of certain tax reliefs.
It is right to regularly review the relevance of tax reliefs. It is right to end tax reliefs that are no longer an economical means of achieving their purpose. But it is desirable that that process be done honestly and not in a populist manner. It is desirable that it be done without demonising selected parts of the business community whose only fault is that they have been successful in business, and have availed of tax reliefs which the Oireachtas chose to offer them.

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