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Sur-tax on profits analysed for Tax Strategy Group Back  
The government’s Tax Strategy Group (TSG) is still considering ways to avoid allowing the benefit of the proposed 12.5 per cent corporation tax rate to certain companies. Close companies which do not distribute profits, profits from development land, the oil, gas and mineral exploration sector and the domestic banking sector are being examined as to how they can be excluded – at least in part – from the low tax rate.

The TSG papers for Budget 2000 which were released included analysis of a possible surcharge on undistributed trading profits of close companies, and distinctions between trading and non-trading income. As was the case last year, any analysis provided to the group relevant to profits in the banking sector were not released.

The paper provided to the TSG on undistributed profits of close companies said that in many foreign jurisdictions, anti-avoidance measures were in place to ensure that closely-controlled companies were not used as a mechanism of avoiding higher rates of personal tax.

‘In Ireland between 1922 and 1976 company tax legislation allowed the Revenue Commissioners to impose a sur-tax on “excessive” profit retentions of close companies. This required an examination of the particular circumstances of each company to determine whether profit retentions were reasonable, and any sur-tax due was calculated on the basis that retentions deemed to be excessive to the company’s needs were apportioned to each of the shareholders.’

The paper then proposed a scheme for surcharging undistributed trading income of close companies in the non-manufacturing sector, ‘based on the existing framework for ‘professional’ companies.

The paper proposed as the main elements of the scheme that ‘Trading companies could retain 50 per cent of after-tax trading profits without triggering a surcharge; the surcharge would be applied to any shortfall between 50 per cent of after-tax profits and distributions made by the company.’

The minutes of the TSG meeting which considered the scheme record only that the Group had ‘a preliminary discussion’ and agreed to return to the issue later. The Department of Enterprise Trade and Employment was to provide input to Revenue ‘and some aspects of the paper may need to be revisited.’

The minutes of the TSG meeting which considered the exclusion of certain types of profits from the 12.5 per cent rate said that, in relation to land, ‘in the absence of a satisfactory apportionment mechanism, the present provisions should stand’. As regards oil, gas and minerals exploration, ‘there was consensus that the 25% rate should also stand, notwithstanding the arguments put forward by the industry.’ Given allowances packages available to this sector, ‘there was no compelling case for allowing the 12.5 per cent rate’.

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