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Budgetary baptism Back  
The new Minister may find that proposals rejected (rightly) by his predecessor are re presented to him prior to the budget. The Minister should reject these proposals. The Minister might also consider correcting some of the errors made by his predecessor who, notwithstanding that he was an excellent Minister, did adopt some poor measures.There are also new landmines being prepared which the Minister would do well to sidestep.
Budget process – partial transparency
Elsewhere you may read of the advice tendered to the Minister for Finance by “the Social Partners” ahead of his first budget on 1 December 2004. You may read this advice because those who tender it make it freely available on their websites or to those who ask. It is also obtainable under freedom of information requests from the Department of Finance. This is right and proper and ensures that proposals can be debated in public by all who might be affected by them.
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Brian Daly, Tax Monitor, May 2004

In contrast, the Public Service provides its advice to the Minister in private. We are not told until after budget day what advice it tendered to the Minister. Even then the veil is only partially lifted with some only of the minutes of the Tax Strategy Group (a Civil Service think tank on budgetary matters) being published following the budget. There is thus limited opportunity for those likely to be affected to comment on the Public Service proposals. Those with viewpoints that differ from those held in the Public Service, or with specialist expertise that may exceed that available in the Public Service, have little or no opportunity to make their views known to the Minister before he decides on whether or not to follow Public Service advice. This is a poor system.

The lack of transparency on Public Service advice is inherited from the days when a penny on the excise duty on tea was a big event, and advance notice of it could make a fortune for some people. Budgetary secrecy in that context does not justify the lack of transparency regarding Public Service advice to the Minister. Budgetary policy would be improved, and the performance of the economy improved, if there could be greater and informed debate before the Minister stands up in the D?il to drop his bombshells. If budgetary secrecy is not imperilled by the publication by the Social Partners of their advice to the Minister, why should it be imperilled by the publication of Public Service advice?

Watch out Minister!
There are three proposals on which the previous Minister did not act, which the present Minister would be well advised to steer clear of.

Surcharge on trading income
The Tax Strategy Group has been urging the Minister for some years to introduce a surcharge on the undistributed trading income of family controlled companies. This is an attempt to claw back (by the back door) the introduction of the 12?% corporation tax rate. Any action in this area is likely to be seen through by Brussels as leaving the 12?% corporation tax rate available primarily for inward investment, and therefore as being contrary to EU law. The proposal would also strip family companies of necessary working capital. Its impact could devastate the Irish economy on both grounds.

Introduction of transfer pricing rules
The introduction of transfer pricing rules on transactions between connected parties has been threatened now for some years. It does not meet any need of the Irish taxation system but was proposed in the interests of bringing our tax system into uniformity across the OECD. Such OECD concerns have some merit but pale into insignificence compared to the costs involved.

The UK have recently found that the application of transfer pricing rules on a cross border basis solely is likely to be contrary to EU law. They have accordingly extended the rules to UK – UK domestic transactions, at a considerable administrative cost to UK business, and no benefit to the UK exchequer. The introduction of transfer pricing rules in Ireland would impose a significant cost burden on business and impact on its international competitiveness. It would also send out a message to potential inward investors that our traditional welcome to such investors has been withdrawn.

Ireland – unlike most countries – has two corporation tax rates . If transfer pricing in a domestic context imputed rental or interest income within a group , it would lead to a deduction typically at 12.5 per cent and a tax charge at 25 per cent and potentially give rise to a surcharge of a further 15 per cent in family controlled groups.

Remove the limit on employee PRSI
Employers PRSI is a tax on the creation of employment. Minister McCreevy removed the cap on employers PRSI and thereby increased the cost of creating a job by about 10%. This occurred at a time when our competitiveness was already under threat. If the same approach is followed with employee PRSI we may expect knock on wage claims, further impacting on competitiveness. It makes no sense for Ireland, to whom full employment is a new experience, to tax job creation. There are other ways of raising money if money is needed.

Past mistakes
The Minister should act to correct a number of mistakes made in previous budgets.
Gift tax, inheritance tax and expatriates.

Mr McCreevy, in his reform of CAT, extended gift tax and inheritance tax (both in respect of benefits received and benefits given to others) to any person resident in Ireland for five years or more, no matter where their permanent home might be. This extension of capital acquisition tax is due to take effect on budget day, 1 December 2004. It will have a significant impact on the willingness of expatriates to be seconded to Ireland by international investors. It will raise almost no revenue but will damage our economy. It was a silly move and should be reversed before it takes effect.

Stamp duty on credit cards, laser cards etc
The high rate of stamp duty on cards is an obstruction to moving to a cashless society. It leads to unnecessary cash handling, with the associated risk of armed crime. It has also reduced competition in retail financial services to a point which might involve EU law issues. It is overdue for re examination.

Research and development tax credits incremental expenditure
Last year Minister McCreevy somewhat reluctantly introduced tax credits for research and development expenditure. As introduced, the scheme is unlikely to have much of an impact on the volume of research and development carried out in Ireland (as opposed to the statistics for research and development expenditure, which will not be the same thing). Its principal defect, widely pointed out to the Minister at the time, is that it applies only to increases in expenditure. From the viewpoint of an inward investor considering the appropriate location for major research and development expenditure, the relief is simply uncompetitive by international standards. An important tax incentive has had a fatal design flaw built into it. The Minister should not wait for a number of years before recognising the need to correct the error. He should act now.

Capital gains tax base date
Capital gains tax was introduced on gains arising after 5 April 1974. As a result assets held at that date have to be valued as at that date. Some of those who engage in the exercise of valuing assets in this fashion weren’t even born in 1974. The Minister should consider rebasing the tax to a more recent date, especially in the light of the abolition of indexation relief.

Current issues
There are a number of issues believed to be under debate in the Public Service which the Minister should watch out for.

Registration of tax plans
This UK proposal would, as explained in the last issue, send out a 'hostile to business' message to inward investors. It is not needed in Ireland where selling of 'tax products' does not exist, and where we already have a general anti-avoidance provision to curb uncommercial tax planning (unlike in the UK). The Minister should resist any proposal in this area.

What is trading?
There is a debate ongoing in the Revenue Commissioners as to what constitutes “trading” and accordingly as to what activities attract the 12?% corporation tax rate. That debate has caused difficulty to those attempting to attract inward investment especially in the financial services area. The debate is not driven by a concern with how best to use the 12? per cent corporation tax rate to accelerate economic growth. The Minister should resist any suggestion that he would legislate to restrictively define the ambit of the 12? per cent corporation tax rate.

Taxation of non-domiciled persons
The UK has been “rumour leaking” for years that the remittance basis of taxation for non-domiciled persons who reside there might be restricted or ended. This process has led to fears that a similar move might be made in Ireland. The remittance basis of taxation is an important incentive for inward investment. It enables multinationals to more freely second expatriates to Ireland on setting up new ventures here. The Minister should protect this tax treatment to the end.

Approved retirement fund payouts
Approved retirement funds are a form of pension fund into which the self-employed and proprietary directors (chiefly) may transfer their pension fund on retirement. All withdrawals of cash are taxed as income. There have been rumours that the Minister might receive advice to make compulsory a minimum level of annual payout from ARFs. This would be a mistake. Adequate funding for pensions, in so far as it occurs at all, has only begun to occur in Ireland. Where a pension has been under funded in the past this can be corrected to some extent by deferring the date on which payments are drawn from the fund, and by allowing the fund to accumulate for a longer period before it is drawn on. Nothing should be done to encourage people to draw down on their pension funds. Where they can make alternative provision for their livelihood after retirement date, through continued earning of income, they should be encouraged in that respect rather than discouraged.

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