| The main players in the pre-budget lobby game have now published their submissions to the Minister for Finance. There is a lack of consensus and no major widely supported themes emerge. The range of demands also seems modest compared to previous years, and a defeatist air can be detected in them. |
The crop of pre-budget submissions to the Minister, as published, does not much resemble those of the 1980s and 1990s. There is an absence of pleas for imaginative new tax incentives designed to stimulate particular sectors. The penny seems to be dropping that the Minister is no longer sovereign. The EU, and its rules on state aids, mean that special sectoral tax breaks are no longer within the power of the Minister to provide.
On the other hand, at a time when we are facing the prospect of low cost, low tax competition from the new entrant states to the EU, there is remarkably little urgency in the submissions about the need to review our tax incentives to ensure that we can remain a jurisdiction of choice for mobile international investment. Realism is good in moderating demands, but complacency is dangerous.
Research and development
About the only proposal to attraact support from more than one party is a suggestions that tax credits, or multiple deductions, be introduced for research and development expenditure. Such a proposal is supported by the Institute of Taxation, by IBEC, by ISME, and in a qualified way by the ICTU.
The UK have introduced an enhanced deduction for R&D expenditure and are making a determined effort to attract multinational research and development spending to the UK. Research and development spending is important in that it supports high paid highly skilled jobs, and has the tendency to result in generation of new enterprises. It can also help in attracting regional headquarters, which are often located close to major R&D facilities.
The ICTU reservation does not appear to be in respect of the desirability of more R&D. Rather it is related to their view that the corporation tax rate on trading income should be 20p.c., and their support for improved incentives for R&D is linked to such an increase in rate. Their submission notes that a substantial R&D break would mean that even a higher CT rate might not adversely impact many sectors of the economy, other than the financial services sector and distributive sector.
Dividend withholding tax
Both the Institute of Tax and IBEC urge the abolition of this tax which imposes administrative costs on the private sector. The Department of Finance may be influenced by the fact that the tax appears to have a yield. That yield is probably largely an illusion since the same tax could probably be picked up as income tax anyway, so that dividend withholding tax represents more a reclassification of tax revenues, than any new or additional tax revenues.
CCABI don’t seek the abolition of dividend withholding tax but urge that the technical exposure to higher rate Irish income tax for a non-resident individual should be abolished. Once again, this theoretical charge is unsupported by any collection mechanism.
The Institute of Tax seek the abolition of the technical charge on a non-resident in respect of Irish source royalties. Since only patent royalties are subject to a withholding tax, the charge is an irritant rather than a source of revenue.
The Bankers Federation make a similar point in relation to the technical charge to tax on a non-resident on Eurobond interest.
These are matters which the Minister could tidy up without sacrificing revenue and they are worth tidying up given our interest in international investment into Ireland.
Holding companies and IP
The banking federations recommend the establishment of a holding company regime in Ireland. Ireland is one of the few EU member states not to provide wide tax exemptions to multinational holding companies. These exemptions typically relate to capital gains on the disposal of foreign subsidiaries, and to dividend income from such foreign subsidiaries.
It is paradoxical that Ireland, the favourite location for inward US investment, is something of a disaster as a location for a regional holding company of such a multinational. The tax rules in question yield virtually no revenue and therefore Ireland could transform itself into a favourable location for holding companies at almost no cost. This argument has been made repeatedly over the years and it is to be hoped that the 2004 budget will at last accept this recommendation.
Intellectual property
The Institute of Tax urge improved tax incentives for intellectual property expenditure. The UK provides a write-off for most forms of intangible expenditure for the purpose of a trade. In contrast, Ireland has very restrictive rules regarding deductions for the cost of intangibles and intellectual property in particular. This is an obstacle in attracting in high tech investment from the USA as such investment typically involves up-front tax costs in the USA as intellectual property is exported, without a corresponding tax deduction in Ireland. Action in this area is important from the viewpoint of maintaining our attraction as a location for inward investment.
Tax payment dates
The CCABI urge the scrapping of the rule introduced last year whereby tax on the exercise of an employment related share option must be paid within 30 days. They also urge changes to the payment dates for CGT (now payable twice a year) as these in many instances involve an obligation to pay tax before the consideration for the disposal of an asset has even been received. In a major transaction that can be crippling.
The 30-day rule on share options is a petty piece of nonsense, of no real benefit to the exchequer. The CGT payment date however could be amended only by deferring receipt of taxes and that is unlikely to obtain support in the Department of Finance in the present climate.
PAYE tax allowance
As in previous years, the PAYE tax allowance attracts interest from those not entitled to it. ISME would like it made available to directors and to the self-employed. They are not of course proposing that the self-employed be put on PAYE, but only that they get the allowance.
The IFA would like to see the allowance abolished (farmers don’t get it unless they are otherwise in employment) and they would like to see tax credits increased for everybody to compensate. In other words, have it extended to everybody - the allowance, not PAYE!
Increase taxes!
ICTU would like to see a corporation tax rate of 20p.c., and a CGT rate of 40p.c.. They would also like to see most tax breaks eliminated. However they would wish to retain film breaks for the film industry (which is heavily unionised) and for trade union subscriptions, where they would like to see the limit increased. They would also like to see bloodstock relief ended for companies and interest relief withdrawn from rented residential properties.
The likely result of these recommendations would be massive unemployment, a sharp drop in the yield from capital gains tax and a housing crisis.
ICTU would also like the artists’ exemption confined to struggling artists. It is not clear why a struggling artist would require tax exemption, nor why tax relief should be confined to talent challenged artists as opposed to talented artists.
Some of the rest
• Bring the interest rate charged on overdue taxes more into line with the very modest rate paid on the refund of overpaid taxes.
• Abolish foreign dividend encashment tax.
• Restore 20p.c. capital allowances for short life plant.
• Relax the leasing ring-fence to allow offset against all financial income.
• Extend the 12.5p.c. CT rate to oil and mineral exploitation.
• Introduce a tax on land rezoning gains, and extend charges for provision of services to land.
• Provide a relief for pre-letting expenses (ie expenses arising before the first letting of a rented property).
• Restore rollover relief on farmland, especially for compulsory acquisitions.
• Liberalise the rules relating to the leasing of farmland, increasing the limit to •10,000 per annum, removing the age limit, and providing retirement relief in relation to the land.
This is just a few of the many demands urged on the Minister.
Red herring
The truth is that a budget is determined by the level of state expenditure. That is the primary restriction on the Minister’s ability to modify the taxation system. None of the representations made to the Minister are focused on reducing state expenditure, although many of them urge him to keep it in check. None identify areas of state activity, or of services provided by the state, which could sensibly be discontinued.
The standard government response to controlling public spending - limiting the number of state workers - is crude. The focus should be on reducing state services and reducing the functions undertaken by the state. That in itself would take care of the level of state employment in a more sensible manner. |
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| Article appeared in the November 2003 issue.
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