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Tuesday, 16th April 2024
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Investment matters Back  
It is not clear how level the playing field will be between onshore and offshore investment products, as a result of the Minister’s changes. Nothing significant emerged in the budget in the shape of an encouragement to salt away for a rainy day.
Investment scene changed
Over the last two budgets the Minister had made major changes in the savings and investment scene in Ireland. He has transformed pensions for self-employed and proprietary directors from being a poorly regarded last resort to being an investment opportunity with a favourable tax environment.

The Minister has successfully reformed the tax regime for life assurance and unitised products so as to extend many features of the IFSC regime for these products on a nation-wide basis. Despite these labours, still further work faced the Minister in the current budget.

Discrimination
The first challenge was one posed by the EU. Our tax laws discriminated heavily against Irish residents who chose to invest in offshore life assurance products or unitised products, rather than such onshore products. Depending on the nature of the offshore product, the resident person faced either a 40 per cent capital gains tax charge, or a 44 per cent income tax charge on the gain on encashment of the product.

In contrast, the onshore life assurance and unitised product regime introduced by the Minister last year involved only a 25 per cent tax on encashment, since reduced to 23 per cent in the current budget.

Discrimination of this sort between domestic investment products, and those marketed from other EU member states is contrary to EU rules. The Minister faced the inevitable and has extended a 23 per cent encashment tax to a wide range of the offshore investment products. The extension will apply both to products taken up after budget day, and to those already in the hands of Irish residents at budget day.

The new rate will not apply universally to all offshore investment products.

It will apply only to those sold in EU member states, member states of the European Economic Area (Iceland and Norway), and OECD member states with whom Ireland has a double tax agreement.

Mixed bag
This list of foreign sources of investment products may look like a mixed bag. What they probably have in common is exchange of information arrangements whereby the Irish Revenue can obtain information from the overseas Revenue regarding financial transactions of Irish residents in those overseas territories. It is difficult to see any other rationale for the restriction of the new regime to these territories.

The practical significance of the ring-fencing of the 23 per cent regime in this fashion is that it excludes investment products marketed from the Isle of Man and the Channel Islands and from locations such as Bermuda and the Bahamas. However it removes the tax penalties from Irish investors wishing to invest in Luxembourg, which is a major provider of investment products. It also removes the penalty from taking up UK products, which may be much more familiar to many Irish residents.

Level playing field?
The Irish investment industry pointed out to the Minister that the playing field he was creating between the offshore industry and themselves did not seem all that level. Investors in onshore products faced a withholding tax. Those in offshore products were left to pay their tax under self-assessment. There was a fear that those investing in offshore products had a cash-flow advantage in the tax payment timing.

The Irish investor in an offshore product will be liable to income tax under Case IV of Schedule D on the resulting gain on encashment. He would be obliged to pay preliminary tax on 31 October in the tax year in which the income arises. Even taking that at its face value, the domestic industry would seem to be at a disadvantage.

If a resident person encashes an onshore policy in (say) January 2002, he would suffer the withholding tax immediately on encashment, whereas if he encashed an offshore policy in January 2002, his tax liability in respect of that income would not arise until the following October. (Bear in mind that the tax year in future will be in line with the calendar year).

The matter could be worse however in that an investor in the offshore product, who is obliged to pay his tax by way of preliminary tax payment, may chose to base his preliminary tax payment on 100 per cent of the prior year liability. That could give him up to another 12 months cash-flow advantage. The onshore industry also faces the administration costs of withholding tax. The Irish investment industry may have an arguable point here.

Incentive to save
The other major issue facing the Minister was that of providing some incentive to spend-happy Irish citizens to save some of their new found wealth. Several proposals were made to the Minister to provide for special savings products which would be free of tax on their investment return.

The Minister’s only reaction here was to provide for a minor tax exemption on certain medium-term credit union accounts. This exemption varies between ?375 of interest, and ?500 of interest per annum, depending on the length for which the account is held. That relief will not go far towards taming the Celtic Tiger. It is worth at most ?100 in tax in a year.

Several years ago a range of low-tax savings products were introduced (special savings accounts, special portfolio investment accounts etc). These are now languishing as the tax rates applicable to them (20 per cent in many cases) are no different to the DIRT rate on deposit accounts, or the capital gains tax rate. One option facing the Minister is to revive these products by either very significantly reducing the tax rate applicable to them, or reducing it to zero.

If these products were revived, they would represent a package which is almost identical to the independent savings accounts (ISA) in the UK. Those products in the UK (which encompass a mixture of deposit accounts, equity investment and life assurance) have a total tax exemption on income and gains arising within the products. There are of course limits on the amount which can be invested in those products.

The Minister has promised to look at this area again prior to the Finance Bill. However he would need to be a bit more ambitious in the scope of his plans than he demonstrated in his dealings with the Credit Union accounts.

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