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Wednesday, 24th April 2024 |
| The debate in the European Community has tended to be divided between those who favour a universal withholding tax, and those who would prefer a universal reporting of payments to Revenue Authorities. This debate has received little attention in Ireland where the Revenue Authorities have opted to adopt both! |
The Irish tax system has spawned a large number of withholding taxes in recent years. This has gone almost unnoticed. Withholding taxes now apply to:
* Annual interest
* Bank and building society interest
* Annual payments such as royalties
* Consideration for the sale of land, mineral rights, and goodwill
* Payments of wages, salaries, and directors fees
* Dividends from Irish resident companies, and other forms of distributions of profits from those companies.
* Rent payable directly to a non resident
* Payments by the State and Semi State companies in respect of professional services
* Payments to construction industry sub contractors
* Payments to forestry industry sub contractors
* Payments to meat processing operation sub contractors
* Payments to hauliers in the construction industry, forestry industry, and meat processing industries.
* Close company loans to shareholders (where there is an effective form of withholding tax).
The Commission on Taxation, in their fifth report in October 1985 recommended "that deduction of tax at source should be extended as much as possible." But they made that recommendation in a context quite different to that in which we now exist. Their advice was based strictly on the assumption that there would be a single rate of tax applying to most taxpayers. They said "The more that people are liable at a single rate, the more will withholding at the single rate turn out to be an accurate assessment of liability." Their thinking was that withholding tax would eliminate the need for tax returns etc. That has not proved to be the case. Notoriously, the higher rate of tax applies to a wide range of employees and others. Persons on low incomes are entitled to refunds of many withholding taxes. The results of these two factors are that withholding taxes probably do not reduce the number of taxpayers the Revenue has to deal directly with.
The second main argument for withholding taxes was that they counter tax evasion. But the same result is achieved by a comprehensive system of reporting of payments. The Irish tax system is now very close to such a comprehensive reporting system so that withholding tax adds little or nothing to that.
Withholding taxes do have severe disadvantages. They considerably increase the overhead costs of conducting business, creating wealth, and providing employment.
They are also a trap for the innocent but unwary. Most people who have experienced Revenue audits will know by now that the focus of the audit, and the centre of the taxpayer's fears, are not the taxpayer's own affair, but rather the operation of the multitude of withholding taxes for which he is responsible. It is in the area of PAYE that many Revenue audit issues arise. Relevant contract tax (withholding from sub contractors) is a technically complex tax likely to leave those who must operate it permanently at risk of making some error. Even PAYE presents its complexities, not least in determining whether a person is employed or self-employed. Any errors in the operation of withholding tax result in the unfortunate taxpayer who has to operate the tax being rendered liable to make good the error. It must be remembered that the total volume of withholding taxes that a business person may have to handle in a year may far exceed his profits.
Before further extension of withholding taxes occurs, there should be a rethink of the philosophy behind them. Do we want to add extra overheads to business? Do we want to expose business people to potentially enormous liabilities if they make mistakes with withholding taxes? Do we want to entrust withholding taxes to businesses some of whom may be insolvent? Are withholding taxes necessary as an anti evasion device, given the level of reporting of payments that now exists? Do withholding taxes actually result in any saving in administrative effort to the Revenue Commissioners? |
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| Article appeared in the June 1999 issue.
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