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VAT on bank charges Back  
VAT should be extended to bank charges as a ‘clawback’ response to decreasing corporation tax intake

This is argued by Dr Tom McCarthy in a paper presented to the ESRI/FFS pre-budget conference late last month. The paper, ‘Current Perspectives on Corporate Taxation’, explores the scope for Government action towards corporation tax in Budget 2000. In light of the argument that the Government’s main concern will be to ‘clawback’ revenue foregone by the reduction in the rate of corporation tax, the paper proposes that VAT should be extended to bank charges and that capital acquisitions tax (CAT) and capital gains taxes (CGT) should be used to deal with any tax avoidance that may be associated with undistributed profits.

Dr McCarthy argues that there is no real justification for treating bank charges differently to charges for the delivery of electricity or tele-communications, and that thus the imposition of VAT should be considered.

Since bank charges are imposed on a per unit rather than an ad valorem basis, McCarthy says that, setting aside the question of market structure, a transaction tax is likely to fall ‘relatively more heavily’ on the institution. If, it is argued, we believe that ‘the incidence of a corporation tax is borne by labour in a small open economy, this usage of clawback to preserve budget neutrality is likely to be progressive’. While the paper presents this bank service charge tax as an extension of VAT, it is also suggested that it might be introduced as ‘some form of excise tax’.

Dr McCarthy’s other recommendation on CAT and CGT follows a fear that the device of incorporation would be used as a ‘moneybox’, or a way of sheltering income from taxation, in closely held companies. The claim is the this would then result in the avoidance or the delay in payment of corporation tax, while the Revenue Commissioners would wait for corporate tax revenue ‘at the pleasure of the firm’. McCarthy argues that avoidance and delay should be tackled separately, with avoidance being approached through adjustments in CAT and CGT.

For the longer term, the paper cautions against the continued pursuit of clawbacks and the assumption that corporation tax is progressive. Dr McCarthy is a member of the Department of Economics at NUI Maynooth.

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