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Friday, 12th April 2024
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Fine Gael urges detailed analysis of tax surcharges Back  
Michael Noonan argues that the surcharges on undistributed income need more analysis than three days at committee stage
F rom a business perspective, certainty is a fundamental concern when it comes to taxation policy. Fine Gael recognised that, when the Government led by John Bruton sought EU approval for a standard rate of Corporation Tax of 12.5p.c. to apply after the 10p.c. regime expired. Despite an ill-judged attempt to seek a standard 10p.c. rate, the current Government finally agreed the new 12.5p.c. rate with the European Commission.

However, it would be a grave mistake to assume that business can now enjoy certainty about the corporation tax regime to plan for the medium and long-term. Likewise, the agencies promoting Ireland as a location for industrial development cannot market a clear future taxation regime.

Why is this? Taxation is a complex area where, in the truest sense of the word, the devil is in the detail. While the business sectors qualifying for the new 12.5p.c. rate have been identified, many of the crucial details defining the effective rate qualifying companies will pay remain shrouded in mystery, as a result of the Government's inaction.

The 'real' rate of tax may differ significantly from the headline 12.5p.c. rate. Budget 2000, on December 1st must clarify the devilishly detailed tax provisions. One obvious area will be the whole question of computing the surcharge on undistributed income and how that will be regulated. It is widely accepted that a standard low rate of tax at the corporate level will be accompanied by measures ensuring that these are distributed to shareholders and taxed as income.

However, any such surcharges on undistributed income must recognise that properly run businesses need to re-invest profits to secure future growth. It is critical that the framing of the necessary surcharge be discussed fully, and well in advance of legislation taking effect.

As a nation, we can all be proud of the modern Irish economy, which has been built with Irish companies at the forefront of industries as varied as software and biotechnology. If the range of modern businesses underpinning our growing economy are to compete, how much profits need to be reinvested? It does not require a detailed grasp of business to understand that simple formulae won't be easily found in answering that question.

Fine Gael believes that the Budget must begin the process of framing these critical aspects of the new corporation tax regime. We must remember that failure to design these provisions effectively could result in the manufacturing sector, which currently enjoys a 10p.c. rate of tax, paying a considerably higher effective rate than12.5p.c. in the future. The Committee Stage of the Finance Bill, where the detailed implications of the proposed legislation will be teased out, lasts only 3 days. The provisions necessary to fully introduce the new 12.5p.c. regime require and deserve much more public consultation and evaluation.

The settling of the past 10p.c. tax regime has been the main tax issue facing business. This has co-incided with greater economic strength and robustness in industry. It is our view that the policy, over recent years to curtail the range of investment reliefs and incentives should continue.

After all most of these schemes became risk free shelters for investors rather than incentives to create and grow new value added enterprises. Fine Gael recognises one exception - genuine promotion of rural renewal, to reverse the catastrophic decline of rural Ireland's social and economic infrastructure.

There is one other significant difficulty facing Irish industry - the growing skills shortage. While many of the measures necessary to deal with this problem lie with the Tanaiste's department, the Budget should address one area - employee participation.

Many forward looking Irish companies want their employees to have a stake in their success. Among the reasons for this is the obvious need to retain skills and avoid the unproductive costs of training replacement staff, in the current strained labour market situation. One simple measure the Budget should address is the taxation of share options. At present, employees are taxable at income tax rates on the 'gain' when an option is exercised, even though the shares may not be sold. This makes no sense. Fine Gael believes that employees should be entitled to receive and hold options with a total value of twice their annual salary, the realised gain on which would be subject to Capital Gains Tax. Any options in excess of this level would be taxed under the current regime.

The capital tax regime itself also contains some anomalies. Fine Gael supports the 20p.c. rate of CGT. However, in the context of a nation suffering badly from infrastructure deficiencies, it is absurd that land compulsorily acquired for roads and other projects, and land sold for the purposes of building advance factories/industrial estates, remains subject to the 40p.c. CGT rate. Inevitably, landowners will try to bridge this gap by seeking higher prices for land.

I believe that at least some of the tortuous and damaging delays to big projects, arising from objections by landowners, could be avoided if the Budget rectified these anomalies.

The most insidious problem of all, however, remains the failure to reflect the increase in house prices in the Capital Acquisitions Tax regime. Ultimately, anything impacting on home ownership will impact on industry. In a nation accustomed to home ownership, spiralling house prices will impact on wage settlements. In the context of the Budget, I realise that the transfer of a home, upon death, to another family member for whom that house was also the principal residence, should be free of CAT. The unacceptable position that forces people to sell their only home in order to meet a CAT liability must be changed. Indeed the whole regime should be simplified to two classes - Class 1 with a £400,000 threshold, and Class 2 with a £30,000 threshold.

The devil is clearly in the detail. It's way past time for Charlie Mc Creevy to get down to some serious devilling if we are to inject that vital ingredient, certainty, back into business taxation.

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