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Saturday, 13th April 2024
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The Irish tax code is designed to encourage economic development by creating an environment which is attractive for investment. Recent Finance Acts have highlighted flaws in our legislative system that could endanger domestic and inward investment. These flaws have been long present, often highlighted, but appear to attract no appetite for reform, writes Brian Daly.
The focus of this article is not on the several excellent features of the Finance Act 2005. Rather it is to consider why that Act contained so many measures that seem inappropriate in terms of how have they come into being.

Some poorly considered measures
In a short article, it possible to provide no more than a “sound bite” on some of the principal areas of concern with the recent Finance Act.

Brian Daly, Editor, Tax Monitor

The legislation dealing with the interaction of tax computations on trading profit, and accounting standards is opaquely drafted and its true meaning is open to discussion. These measures have the potential to be of fundamental importance to the taxation system and may, depending on their meaning, represent a radical departure from past practice in the computation and recognition of taxable income.

Changes have been made in the area of the taxation of employment related share options. These failed to clarify fundamental uncertainties in the existing law. The reference inserted to the liability of a non-resident person is believed by many commentators to be meaningless. Another change, contained in the Bill as initiated could have denied multinationals a tax deduction in relation to the cost incurred by them under share option schemes. This was amended only after urgent discussions with the Department of Finance.

The foreign assets of life assurance companies operating in Ireland through a branch were subjected to CGT in a piece of legislation not published until the Committee Stage of the Bill, and without prior consultation with the industry.

A septannual tax charge on the increase in the value of life assurance policies was proposed at short notice and on grounds that are unclear. This has the potential to damage the gross roll up regime only recently introduced. This radical change was introduced with minimal consultation in a ridiculously short time scale. It is currently suspended pending a Ministerial Order (thankfully) which was a late acknowledgement that more consultation was needed.

Significant shareholders, and their relatives, have been denied a credit for PAYE deducted from their remuneration to the extent that an insolvent company is unable to account for that PAYE to the Revenue.

This piece of legislation can be recognised, even at a glance, as arbitrary, unfair and unconstitutional.

The aggregation for stamp duty purposes of the consideration for transfers of interest in the same property, that occur within 12 months of each other, is so widely drafted that it would catch situations which the Minister suggested were outside the scope of the legislation.

In the same Finance Act that extended the protection of a court warrant to private dwellings in the case of Revenue audits, the Revenue are granted right of access without a warrant to heritage houses, including those in use as private dwellings. Once again this is of doubtful constitutionality, and unnecessarily so.

It must be emphasised that this year’s Act does not differ greatly from any recent Finance Act in the degree to which it contains measures which have been introduced and passed through the D?il without being subject to rigorous and informed debate.

But does it matter?
Yes it does matter, for at least three important reasons.

Firstly, investors seek not only a favourable tax regime, but one which is stable and transparent. They might not be attracted by a tax system if it exposed them to arbitrary shocks on an annual basis. Without inward investment our economy could collapse and our tax revenues dry up.

Secondly, we will not have a contented society if the public are constantly given the impression that the burden of taxation is not shared justly or even lawfully. The Revenue Commissioners on a regular basis discover that the laws which they draft and recommend to the Government for enactment have an application and meaning wider than they had conceived. Where this occurs, it is often not due to the genius of tax advisers but to haste in enacting the legislation.

Thirdly, especially in the context of EU law, tax legislation is becoming more complex and the potential for unforeseen gaps in drafting laws is increasing.

What’s the problem?
The first problem is that the whole process of legislation is too rushed. Decisions are not made on major taxation changes until shortly before 1 December in each year. Because a very small number of these changes are enacted by financial resolution on the night of the Budget, there is a constitutional time limit on enactment of a Finance Act containing those measures. This requires it to be enacted by the end of March.

The scores of other complex taxation measures which were not the subject matter of financial resolutions, and need not be subject to such a time limit, are nonetheless bundled into the same Finance Act and rushed through in the same manner.

As a result, neither the public service nor politicians, have adequate time to consider the policy behind the measures, or the appropriate drafting to give effect to them.

But there is a further compression of time scale. It has become increasingly common that the majority of measures in a Finance Act are not even referred to by the Minister in his Budget speech. The public, and interested areas of industry, are likely to first become aware of them when the Finance Bill is published, typically in mid-February. This process was taken to an extreme in the current Finance Act, when the Budget in December 2004 made reference to hardly any of the contents of the Finance Act. There is typically a period of three to four weeks between the publication of the first draft of the Finance Bill, and the end of the Committee Stage debates in D?il Eireann. Further amendments to the Bill cannot occur unless the Minister has specifically referred to them during the Committee Stage. Few tax advisers manage to even read the entire Bill in that period. The Bill this year ran to approximately 190 pages of complex legislation much of it capable of being understood only by a reader who also consults approximately 4000 pages of existing tax legislation.

Matters are made worse when significant new measures are not published until the Committee Stage debates commence. Such measures are open to public consideration for only three days. This occurred in the current year with the extension of CGT to the offshore assets of non-resident life assurance companies, and the proposed changes to the Gross Roll Up regime.

There is a second problem in our legislative process. Tax is complex. Neither Ministers nor TDs can be expected to be experts in the legislation which they have to scrutinise. Unfortunately, the process of debate in D?il Eireann is such that the only informed comment normally available to legislators comes from the Public Service. The Public Service is no doubt excellent, informed, and impartial. But it does not have a monopoly of wisdom. Legislators must find the means of opening up their debates to representations and evidence from informed and interested parties. To do that of course endangers the Public Service monopoly of influence over legislation. It would also expose legislators to further lobbying by sectional interest to which it might require a lot of political courage to say “no”. But if the process is in public and transparent, that in itself will protect the legislators from improper influence.

The future?
The last Minister, Mr McCreevy, reformed the tax code more radically than possibly any of his predecessors. Mostly this was for the good, sometimes perhaps not so. Mr Cowen has the opportunity of extending reform not so much to the code itself as to the process of enacting it. He should consider the following:
• Introduce two Finance Acts each year, rather than one. The first Finance Act should concern only that handful of measures which are enacted as Financial Resolutions, and to which a constitutional time limit applies in terms of enactment. The second Finance Act should contain all other taxation measures. The second Act would be free of the existing constitutional restraints regarding timing by reason of containing no items enacted by Financial Resolution.
• Avoid introducing new measures, other than minor technical changes, at Committee Stage. Where it is necessary to do so, ensure that the Committee Stage of the Bill is adjourned for at least a month after the new measure has been published, so as to leave adequate time for its debate at Committee Stage.
• Require that all legislative proposals in a Finance Bill contain an economic impact assessment statement.
This statement should indicate what impact on economic development the measure may have, and set out reasons for the conclusions. This would help ensure that some of the more damaging measures, such as Mr
McCreevy’s extension of gift tax and inheritance tax to expatriates working in Ireland, would not be enacted.
• Open up the Committee Stage debates on the Bill to hear evidence from the taxation, accounting, and legal professions, and the social partners and from important State agencies such as the Industrial Development agencies and the ESRI.

If the companies that have contributed to the growth of the IFSC, the CRHs, the Kerry Groups, the Microsofts, the Diagios, the Abbott Laboratories, and similar drivers of our economy were not committed to always doing better, neither our economy nor that of the world would be where it is today. It is time that our legislators adopted a similar “can do better” philosophy in relation to this aspect of their work.

Where there has been appropriate consultation in relation to proposed legislation (this has occurred in relation to many aspects of the legislation applying to IFSC companies) the benefits have been clear to all.

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