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Thursday, 25th April 2024 |
| The UK is Ireland’s strongest competitor for inward investment. It is the second most important potential source of inward investment into Ireland. How do our tax systems compare? |
What does a foreign potential investor see when he looks at the British Isles? He sees two countries speaking English in the same time zone. Both have transport systems in a state of crisis, and broadband communications facilities in urgent need of upgrade. Both have business friendly governments and regulation that, by European standards only, is relatively light. Both have good international transport links. Both have good financial infrastructure, respected legal systems and sophisticated professional support services for business. In fact, there isn’t a lot to chose between them. Taxation may therefore be the make or break factor in choosing a location. How do we compare?
Corporation tax
Ireland’s corporation tax rate on trading income will be 16 per cent for 2002. On 1 January 2003, it will be 12.5 per cent (apart from the large number of existing companies who will continue to enjoy a 10 per cent rate until 2010 in many cases).
The UK does not compare well. For profits in excess of Stg1.5 million the corporation tax rate is 30 per cent. There are lower rates (principally the 20 per cent rate on profits up to Stg300,000) but these lower rates are not likely to be of interest to most multinational investors as their profits are likely to exceed the relevant limit.
Comparison is not of course a matter entirely of tax rates. The tax base is defined in broadly the same manner in both countries but the UK has a tax system which is notoriously complex. In that respect it is worse than even our own. It also has controlled foreign company legislation and transfer pricing rules which incoming investors would not find very attractive. Admittedly we are probably about to make the mistake of copying their transfer pricing rules!
Capital gains tax
One of Mr McCreevy’s major achievements was slashing our rate of capital gains tax to 20 per cent. Chancellor Brown has outdone him. On most business assets held for four years or longer, the effective UK rate is only 10 per cent. Furthermore the UK is probably going to introduce in the near future a complete exemption from capital gains tax on a disposal of major business interests, eg subsidiaries by groups of companies.
The principal implication of the UK’s more favourable capital gains tax regime, and particularly if an exemption for a disposal of subsidiaries is introduced, is that the UK is a more favourable location for a holding company or head office. Ireland’s failure to introduce an exemption for companies on disposal of subsidiaries continues to hamper our ability to become European Headquarters location of choice for multinationals.
Stamp duty and capital duty
Ireland charges 1 per cent capital duty on assets subscribed to a company for share capital. The UK does not impose this upfront tax charge on new businesses. Financial services companies in particular are affected by this unfavourable Irish tax charge.
Ireland’s stamp duty rates are notoriously high. Sales of marketable securities attract a 1 per cent stamp duty, whereas the equivalent UK rate is only a half percent. Residential property can attract stamp duty of up to 9 per cent, whereas Britons were appalled when the rate on UK property worth more than Stg500,000 was increased to 4 per cent! There is a greater ‘dead cost’ for a senior executive assigned to Ireland in buying a house here than there would be in the UK.
Inheritance tax
Ireland charges 20 per cent inheritance tax and gift tax. The UK charges no inheritance tax on gifts made more than seven years prior to death. The tax which is charged is broadly on assets held at death, and gifts made in the prior seven years. However it is then charged at a penal 40 per cent rate.
Ireland brings expatriates within the gift tax and inheritance tax net (both for what they give and receive) after only five years’ presence in the country (from 2004). In contrast, the UK does not bring expatriates within its net until they have been at least 17 years in the country. This latter feature may be far more important in the view of an incoming investor than the actual rate of tax.
VAT
From the viewpoint of an inward investor, VAT matters principally if they are providing exempt services. Largely this means that VAT is a sensitive issue for financial service companies. They cannot recover the VAT on their costs and therefore it hits the bottom line. The standard VAT rate in the UK is 17 per cent. In Ireland it is 20 per cent. That implies a 2 per cent differential on non salary and non financial local costs for a financial service businesses.
Income Tax
The relevance of income tax is largely that it increases the costs of employing labour, and can be a disincentive to staff seconded in by the investor.
Ireland’s top rate of income tax is 42 per cent, currently applying once taxable income exceeds ?17,000. In the UK the top rate is 40 per cent, which kicks in once taxable income exceeds Stg?29,400. Our standard rates of income tax are broadly similar (20 per cent in Ireland, 22 per cent in the UK).
Both Ireland and the UK offer the ‘remittance basis’ of taxation to non-domiciled persons seconded here. This means that such persons have considerable scope for ‘managing’ the total amount of income they recognise in the Irish or UK tax system.
Although the UK personal tax burden is lighter than it is in Ireland, the distinction is not so great as is likely to influence any inward investment decision.
Conclusion
Ireland beats the UK hands down in the area of corporation of tax. In those areas where the UK has an advantage (capital duty, stamp duty, capital gains tax on company disposals, and application of inheritance tax to non-domiciled persons) it would not cost a lot for Ireland to narrow the gap considerably. Unfortunately this was neglected in the years in which revenue was buoyant and might not be a priority in an election year. |
Eric Wallace is a tax partner in KPMG.
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| Article appeared in the November 2001 issue.
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