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McCreevy: ‘I’m open to changes’ Back  
The Minister for Finance invites experts to highlight the problems with dividend withholding tax and ponders obstacles to his public pensions plan in EU accounting rules
Commenting in the course of an interview on IFSC matters in the October issue of Finance Dublin,The Minister for Finance, Charlie McCreevy said he has an ‘open mind’ about the dividend withholding tax and possible changes to it. After outlining the exemptions to the tax available to dividend recipients in treaty countries and EU member states, he said, ‘if there are difficulties in certain areas, I’ll certainly look at them in next year’s Finance Bill’. He said he was not aware of enormous problems, but added, ‘I want to see what are the problems. I’m prepared to look at it again.’

McCreevy said that he was aware of the arguments that the dividend withholding tax introduced in the 1999 Finance Act sent a negative message about the absence of Irish taxation on non-residents, an argument ‘the IDA and others had made’. But, in general, he said, ‘it’s a very mild withholding tax.’

‘When we committed ourselves to the 12.5 per cent corporation tax rate, I signalled then that there would be clawbacks’ and the withholding tax and other measures could be seen in that context.

Pensions management

The Minister said there were ‘a lot of things to tease out’ in relation to his plan to pre-funds pension liabilities of the State with the ?3.7 bn proceeds of the Telecom Eireann flotation plus an annual contribution of 1 per cent of GNP.

‘Pensions are a big hobby horse of mine. There’ll have to be legislation. We’ve probably got more work to do on that than on the Single Regulatory Authority.’ It is expected that two pieces of legislation are required - one to allow the NTMA a new role in relation to pensions management and one to set aside the funds.

But the Minister signalled a difficulty that may delay the introduction of the scheme. ‘Under EU Stability Pact accounting rules, it seems that we would be penalised for setting aside the money. It can’t be right to be penalised for doing something prudential. So, we’ll probably have to look to have the rules changed.’ McCreevy added that ‘how these things are accounted for will have a bearing on my views’ on the issues to be decided in relation to the management of the pension fund.

The accounting rule arises from the common standards for calculating national deficits under the Maastricht Treaty and the Stability Pact. It is critical because of the ‘punishment’ procedures that can be triggered if an EU Member State’s budget deficit exceeds 3 per cent of GDP. The 1 per cent of GNP set aside for the pension fund would be a budget cost and would be counted towards the deficit - so that it could in theory tip Ireland over the minus 3 per cent limit. But more problematic is the charging as state expenditure payments to pensioners from the pension fund, a double whammy.

The NTMA will not actually carry out much of the investment management, but will largely contract it out to private sector managers. Mr McCreevy’s comment was ‘I haven’t said that it’s going to be the NTMA. I see many advantages to having it there but I haven’t ruled out the private sector’.
He confirmed that private sector management would have to be put out to tender.

Taxation of share options

McCreevy said he was open to ideas for a change in the way share options were taxed, which were included in proposals made by the Irish Software Association and others. At present, share options are taxed on exercise of the option as income, not as capital gains, and not on the disposal of the acquired shares.

‘There’s a big debate on this’ he said. ‘It’s a pretty vexed question. We must have equity between all classes of taxpayers. We must also have innovative ways of rewarding people, while we want to retain revenue in the state. If you’re working hard in Dublin and can’t avail of share option schemes, it’s not fair.’

‘We must provide for incentives. If I can find innovative ways of sharing the growth, I will do so.’
He added, ‘We’re also conscious of the attractiveness of other countries in this regard.’ In short, ‘my mind is not closed on any of these issues’.

Personal tax

As regards the marginal rate of income tax, Minister McCreevy said, with trademark relish, that he was known for years as one who favoured lower rates of taxes, especially since the 1980s when the marginal rate was over 70 per cent. Now, he said, ‘there must be a fair marginal rate of tax. When more than fifty per cent of your money is taken by the state, it’s not fair.’
The issue for society was, ‘We must decide on the level of services desired. You go to the minimum rate possible when you decide on the level of services your society wants.’

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