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Watch for the Finance Bill Back  
The Budget contained sufficient substantial measures that there was little focus on matters expected to be referred to in the budget, on which the Minister was silent. Typically the budget is such of the good news as the Minister wishes to break on live television. Bad news, and measures difficult to put over in a 'sound bite' may be expected in the Finance Bill in February 2004 says Conor O'Brien in this analysis of Budget 2004.
Some topics are on the agenda for future action and decision making, even though they did not feature in the budget statement.

• Environmental and carbon taxes: The Minister will be obliged to take some action in this area sooner or later, and probably sooner. A consultation process has been under way and generally 2005 is seen as the year in which some serious environmental and carbon taxes will be introduced. It remains to be seen whether the Minister will postpone the introduction of the legislation to apply these taxes until the Finance Bill of 2005.
It is known that he wishes to have a slim Finance Act in 2004 as he will be distracted by Ireland’s role in the EU presidency. Environmental taxes can cover a wide range of taxes including taxes on landfill, containers, batteries, fertilisers, carbon content of fuels, to name but a few.

The irony of environmental taxes was underlined by the Minister’s comment in the budget speech on indirect taxes, where he noted that he had to show restraint in further increases due to reducing yield. Some of these indirect taxes, eg on cigarettes and tobacco products, are of course intended to influence conduct rather than to yield revenue. It is ironic if the Minister cannot afford to discourage smokers too much! Will he find equally difficult, once environmental and carbon taxes are introduced, to levy them at a rate that would actually result in a low yield, but modify the conduct of industry and consumers?

• Transfer pricing: At the beginning of 2003 it was widely taken for granted that the Minister would introduce transfer pricing rules on cross border transactions between related parties in the 2004 budget. Since then it has become apparent that under EU law transfer pricing has to apply to domestic transactions as well as cross border transactions. The UK is now implementing such domestic transfer pricing rules at considerable cost to industry, and at no benefit to the exchequer. It may be that the Minister has spotted the trap in time and that transfer pricing may now be off the agenda. However the Minister has not clarified this.

• Pensions simplification: There are at present a raft of pension related tax relieved products and regimes, including retirement annuity contracts, occupational pension schemes, PRSAs, approved retirement funds, small self administered funds etc. The rules relating to tax relief for contributions to these funds, and the rules under which the funds must operate in terms of provision of benefits, differ as between each other. They are also complex. It is known that a study designed to produce a more uniform set of rules has been under way. Most commentators expected that the Minister would take no further action in the area of pensions until the review group had reported back to him. Some commentators however feared that some measures might be reintroduced piecemeal in the 2004 Finance Bill eg in the area of approved retirement funds. Time will tell.

Issues avoided
There were several issues which the Minister could usefully have tackled, and to which he has made no reference.

The requirement that a company pay the first instalment of its corporation tax one month prior to its year end, and at a time when it does not know what its final liability will be, has proved expensive for companies to operate. There would be little or no loss to the Minister if he permitted the first payment to be based on the prior year liability, rather than requiring a company to crystal ball gaze and base it on a current year liability. This simple reform was not referred to by the Minister.

Employees who exercise share options are currently penalised by having to pay the tax arising within 30 days of the exercise, even though they might not by that date have received any cash from the sale of the shares acquired in the exercise of the option. It is difficult to determine any policy behind this requirement, other than mean-mindedness. It is difficult to see why the tax obligation in relation to the exercise of share options could not be brought into line with the payment dates for capital gains tax ie 31 October for gains in the first nine months of the year, and 31 January for gains in the last three months of the previous year.

It had been hoped that the Minister would relax the leasing ring-fence so as to permit the offset of allowances on losses from leasing against other financial service income of the leasing company. This is the sort of move that would be expected from a country that prides itself on “understanding” the financial services industry. In commercial terms, leasing income and other financial service income are indistinguishable to a leasing company. Artificially splitting them for tax purposes makes no sense.

The Minister had been urged to end the technical exposure to Irish tax liability on non-resident recipients of royalties from Ireland, and of interest on Irish source Eurobonds. These technical charges to tax are generally not supported by any collection mechanism. It is likely they yield little or no revenue and yet they render Ireland a more difficult location with which to do business especially in the high tech industry and financial services area. Since those two areas are our primary targets for economic growth, it is strange that the Minister couldn’t address these silly rules, at no cost to the exchequer.

The banking industry had hoped that the Minister would abolish dividend encashment tax. Don’t be embarrassed if you have never heard of this tax. Probably most Ministers for Finance went through their periods of office without ever hearing of it either, but it has been there all the time. It obliged banks handling dividend payments arising from non-Irish and non-UK companies to withhold Irish tax from them. The legislation is ancient, poorly drafted, and quite obscure. The Revenue Commissioners have recently been carrying out targeted audits of the enforcement of the tax. This could well be the first time in the history of the State that the operation of the tax was examined by the Revenue.

The audit process is causing difficulties for financial institutions, against the background of the obscure legislation. The tax in any event is contrary to EU law since it discriminates between dividends from other member states, and Irish and UK dividends. The Minister might as well have bitten the bullet and abolished it. Since it is merely a withholding mechanism, it does not in truth contribute any additional revenue which would not have been obtained under the self-assessment process.

In 2003 the Minister was able to show almost a doubling of his take from capital gains tax. This marvellous result was achieved by the Minister by a measure in the 2003 budget which brought forward the payment date for capital gains tax on gains arising in the first nine months of 2003. Normally such capital gains tax would not have been payable until 2004. The Minister brought the payment date forward to 31 October 2003 and therefore in 2003 benefited from one full year’s capital gains tax yield, and a further nine months yield. That is a bonanza which is not repeatable and his estimates for CGT yield in 2004 are little over half those for 2003.

There are other hold-over measures from the 2003 budget which may compensate in 2004 for the fact that the CGT bonanza cannot be repeated. The application of PAYE and PRSI on benefits-in-kind will take effect on 1 January 2004. Since the Minister has left a cap or ceiling on the amount of remuneration on which employee PRSI is payable, to a large extent the application of PRSI to benefits-in-kind is a tax on employers only rather than on employees. Lower paid employees typically receive fewer benefits-in-kind than higher paid employees, so it makes not a great deal of sense that employee PRSI should be applied to benefits-in-kind when any such tax would be disproportionately paid by lower paid employees. Nonetheless, this will be a good money raiser for the Minister in 2004 even though it did not feature in Budget 2004.

The ending of indexation, and the cancellation of roll-over relief for capital gains tax purposes in the 2003 budget will only really begin to bring in revenue in 2004 and later years. As each year passes, the impact of the withdrawal of indexation will become more pronounced as inflation creates artificial gains which will be subject to capital gains tax.

The phasing out of roll-over relief similarly will only yield its full revenue potential in 2004 and later years. This is because roll-over relief was phased out rather than immediately abolished.

Next moves
It is likely that the Minister for Finance will publish a list of his proposed measures for the 2004 Finance Bill in January 2004. The first draft of the Bill will probably appear in Februa
ry 2004 and even that draft is likely to be added to as it progresses through Dail Eireann.
However the demands of the EU presidency are likely to mean that the Minister will resist the inclusion in the Finance Bill of further controversial items, or detailed technical measures.

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