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Corporation tax clawback proposed in budget Back  
Gearoid Griffin highlights a number of the issues raised in the budget which are awaiting further and significant clarification in the Finance Bill.
The Minister for Finance presented his Budget for 1999 on 2 December 1998. He must introduce a Finance Bill containing proposals to give effect to the taxation aspects of the Budget within 90 days of that date - it is expected that the bill will be tabled in the first or second week in February.
Following that, the Bill will be debated by both Houses of the Oireachtas passing through several stages before enactment. During this period of time it is likely that some of the original proposals will be amended - indeed some ‘amendments’ may be items to which no reference was made either in the Budget or the Finance Bill as introduced.

The Bill must be passed by both houses within days of being tabled - it is expected that this will take place in the first or second week of April.

Observers of this annual drama suggest that those who propose ‘amendments’ before the Finance Bill is introduced have had a great deal more success than those who react to the Bill.
In his Financial Statement on the Budget Mr McCreevy alluded to several matters which would be dealt with in more detail in the Finance Bill, or at a later stage.

Business taxation

The Minister has indicated that all tax reliefs and allowances for businesses will be cut back as
necessary. It will be interesting to see what the Minister considers necessary to be cut back and why such a cut back is considered necessary.

With a corporation tax rate of 12.5 per cent there may be a temptation for privately held companies not to distribute profits so that the shareholders avoid charges thereon at personal income tax rates.

The Minister has indicated that, while a necessity to retain profits to fund investment will be recognised, there may nevertheless be a surcharge in certain circumstances. A judgement as to whether funds need to be retained for expansion of a business or whether they have been retained to avoid higher tax must of necessity be highly subjective. Accordingly it is likely that any such legislation will include rule-of-thumb provisions to determine whether or
not some part of retained profits is liable to surcharge.

It present surcharges imposed on companies because of non-distribution of investment income are not available for credit when that income is finally distributed. It is suggested that in the interest of equity any surcharges introduced in relation to non distribution of profits be available as a credit against withholding tax on future dividends, or in the event of disposal of the company, as a credit against any capital gains tax arising on disposal.

Income tax

It seems likely that from some time in the future the tax year will be the calendar year rather than the year to 5 April, resulting in one tax period of about nine months instead of a year. While this has many budgetary implications it will also raise compliance issues both at the level of equitable imposition of taxation and in relation to dates for payment of tax and making
of returns.

It is suggested therefore that the Minister publish proposals before their inclusion in a Finance Bill and invite comment from taxpayers and tax practitioners.

Buses, trains and automobiles

The Minister has indicated that the cost to employers of providing bus and rail passes will not be taxed as a benefit-in-kind on employees. On the other hand he has set up a review group to ‘come up with a fair and workable system of applying BIK’ to car parking spaces. It seems that the purpose of both provisions is to discourage the use of cars in urban areas. While exempting bus and rail passes from BIK tax may help to achieve such a result it is dubious that taxing employees by reference to car parking space utilised will achieve anything other than to increase the tax yield.

Further ‘traffic related measures’ are signalled by the Minister in a proposal to take a number of tax based initiatives to alter the relative prices of different modes of transport in favour of those that create less pressure on road use and the environment. Such taxation can measures have only minimal impact on traffic problems. The solution lies in an efficient and economical transport service coupled with the park and ride facilities alluded to by the Minister.

Tax assisted savings

The proposal to introduce these schemes is very welcome since the experience in the UK, where they have existed for some time, has indicated that they have a very positive effect on employee morale.

While they can readily be set up by quoted companies, difficulties in operation of such schemes arise for non quoted companies by reference to valuation of shares at date of grant of option and at date of disposal and in relation to a market for disposal of the shares. It is hoped that the legislation to be introduced will address these difficulties.

Retirement Pensions for self employed

The Minister indicated some provisions intended to bring retirement pensions for the self employed closer to the regime pertaining for employer sponsored pension schemes. This is a welcome measure both from the point of view of better enabling the self employed person to provide for income in retirement, and, through savings invested, the creation of more wealth for the nation.

A few other matters which the Minister might consider in this context are:
l Not restricting the utilisation of the percentage that can be saved in one year to that particular year since in a growing business it will not always be possible to avail of the saving in a particular year due to cash flow requirements. This could be easily achieved by making the time limit for contribution not the end of the tax year, or 31 January following the tax year but rather at any time within, say, ten years following the tax year;

l Introducing enabling provisions so that (as is the case with employer sponsored schemes) the self employed person can move funds from one investment manager to another;

- Introducing enabling provisions so that a person who has been self employed and has made pension contributions can, if he or she becomes employed, transfer monies saved into an employer sponsored pension scheme and vice versa.

- Making contributions by the self employed deductible for PRSI and levies as is the case in relation to contributions made to employer sponsored schemes;

- Liberalising the definition of “net relevant earnings” so that the same scope for application of the relevant percentage of earnings is available to self employed as is available to employees.

The Minister also stated that ‘in the context of the increased contributions it would be necessary to examine the question of an earnings ceiling.’ Such examination arises, presumably, in the context of ensuring that there is not an excessive strain on the Exchequer. This consideration should, however, be secondary to the main objective which is to encourage persons to provide for their retirement and to enhance the nations wealth.

Gift and inheritance tax

Prior to the Minister’s announcement these taxes applied to gifts and inheritances taken on or after 2 June 1982. It is now proposed that only gifts and inheritances taken since 2 December 1988 (ten years before Budget day) will be taken into consideration. It is suggested that the Minister consider a further modification of this proposal, to the effect that gifts and inheritances would be agreeable only in relation to those taken within ten years before the date of a gift or inheritance. Such a ten year rolling period has been applicable in France for some time and is believed to have been beneficial in attracting expatriates to return to that country and discouraging people from emigrating.

Revenue powers

The Minister is examining proposals by the Revenue Commissioners for extra powers in relation to access to bank accounts in the context of the Finance Bill 1999. This is likely to be a contentious matter, particularly in the light of developments reported in the media over the recent past. Experience indicates that when provisions are formulated in the context of a Finance Bill, and effectively sponsored by the Minister, it is very difficult to amend such provisions. It is to be hoped therefore that because of the wide ranging implications of such legislation the proposals might be aired by the Minister for comment and debate prior to inclusion in the Finance Bill.

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