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Tax strategy from the inside Back  
Part of the deliberations of the Tax Strategy Group within the Civil Service have been published in relation to the 2001 Budget. Some of these papers read strangely in the light of the subsequent Budget, suggesting that the Civil Service machine was not on the same wavelength as the Minister on all issues. Large parts of the papers are withheld for reasons that are questionable.
The Tax Strategy Group is an interdepartmental meeting of senior civil servants who brief the Minister on the options open to him in his budget. They meet over a period of about five months, starting in mid-Summer and continuing right up to the budget. Thanks to the Freedom of Information Act the minutes of their meetings and the briefing documents considered are published. However many briefing papers are withheld, or have been severely edited.
It is refreshing to be able to see at work the machinery that produces the budget. Our democracy is the better for this.

Why censor?
It is understandable that where the civil service is considering a taxation measure about which advance knowledge could enable a person to make a profit, or where they are contemplating an anti-avoidance measure where advance knowledge would merely ensure the horse would have bolted before the stable door was shut, the discussion papers should be withheld until action is taken. It is difficult however to understand the justification for withholding some of the material.
The most obvious example is the material relating to a proposed surcharge on the undistributed trading income of a company. There may be arguments in favour of such a surcharge (I cannot think of any, but let’s keep an open mind!). If there are why do they fear the light of day?
The withholding of the civil service thoughts on this matter (which is not a matter of anti-avoidance, nor is it news likely to provide windfall profits to selected individuals) cannot serve to stimulate informed debate. The final decision of a Minister on the matter is likely to be improved if he has had the advantage of that debate and if voices from outside the civil service have played a part in that debate. Why are the papers withheld?

The background to the proposed surcharge (which thankfully the Minister has resisted for the last few years) is an attempt by the back door to claw back the reduction in corporation tax rates. The objective seems to be to devise a tax which will fall only on Irish business people and not on multinationals operating here.

The search for that Holy Grail is futile. Any tax which operates in that fashion (no matter how it is dressed up in legislative language) is sure to fall foul of EU law, and if it does it risks bringing our 12.5 percent corporation tax rate with it.
We already have a surcharge on the earned income of some companies - on the professional services income of companies. It is questionable whether this tax, affecting some sectors of the economy only and not all sectors equally, can survive under EU law. Tax regimes that are tailored to penalise some sectors, and to favour the sectors not penalised, have a high risk of being contrary to EU state aids rules.
The 12.5 percent corporation tax rate is a bedrock of our economic development strategy for the medium term future. Neither historic baggage such as the surcharge on professional income nor hankering after the good old high tax days should be allowed to endanger it.

A paper prepared by the Department of Social, Community and Family Affairs for the group discloses the fact that an actuarial review of the social insurance fund had been commissioned. An interim report was expected before the end of 2001. This document from the Department revealing that a review had been commissioned was considered by the Tax Strategy Group on 23 October. There is no indication that the actuarial review report, in interim or final form, was available to the Minister before he made his decision on budget day to raid the social insurance fund in order to plug a potential budget deficit. In the January issue of the KPMG Tax Monitor reference was made to the absence of evidence that the Minister’s seizure of the fund surplus was supported by an actuarial review, as would be the norm with any insurance fund.
In the light of the Minister’s raid, the comments of the Tax Strategy Group at their meeting of 23 October are of interest, and ironic. They said ‘The group noted that PRSI now has a much wider base and that Ireland has an ageing population. While the social insurance fund is currently in surplus, decisions need to be taken in the context of a long-term strategy for the fund’. On budget day, they got their decision and their long-term strategy! It was ‘grab the cash and run’.
The raid on the social welfare fund is already coming back to haunt the Minister. Opposition Parties are considering what they could do with the special pension fund created by the Minister to meet the cost of pensions in future years, when the working population as a proportion of the dependent population will be lower than it is at present. The creation of that fund was one of the most important decisions taken by the current Minister for Finance and the current D?il. Rather than set a precedent for its plundering, the Minister might have been better to face up to a budget deficit, or even to the grim task of cutting expenditure.

Do you know where you were on September 11? Members of the Tax Strategy Group do. They were at a meeting considering a VAT paper that said in relation to the standard rate of VAT ‘It is assumed that any change for consideration for this rate would be a reduction’. Little did they know! The Minister increased the rate by 1 percent.
That paper is quite an interesting review of the policy options which, in theory, are open to the Minister in VAT. The paper notes that Ireland has zero rated many items and that it would make sense to remove the zero rating and charge VAT on these items. Similarly it notes that up to 40 percent of the VAT tax-take arises from the ‘low rate’ of 121/2 percent. Again, many of the items at this rate might well be charged at a higher standard rate. If those two measures were taken, the standard rate could be significantly reduced.
However there are obstacles in the way: If our VAT rates move significantly above those in the UK, cross-border trade is affected (Dundalk doing its shopping in Newry!); the less well-off will demand substantial social welfare hikes; the Unions will demand substantial pay hikes. Who knows where we would all end up? So nothing really can be done.
Those who listened to the Minister’s budget speech will recall that he explained his increase in the standard rate of VAT from 20 percent to 21 percent as being a reversal of a mistake he had made in the previous year and being in part motivated by the failure of business to ‘pass on’ the VAT cut in their prices. The tax strategy group referred to ‘A significant number of calls to the Department of Finance, complaining about the absence of VAT reductions in pubs, electrical stores, general stores, the NCT and cable TV bills. There was also anecdotal evidence that the reduction had been passed in some pubs and shops. This picture of the reduction being passed on in some categories and not in others is reflected in discussions held with the CSO’.
Phone calls from pubs and anecdotal evidence sound like a very dubious basis for a 1 percent hike in the standard VAT rate. This is so even if the CSO are of the same view.

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