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Saturday, 19th September 2020
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Thoughts for Wednesday's Budget Back  
The downside of the next budget is that inevitably, it will be influenced by short-term election needs. But there is much the budget can do to improve the tax code and the economy, without conflicting with electoral needs. With our power to use the tax system to develop the economy significantly limited by EU rules, it is very frustrating to see those difficulties added to by poorly thought out domestic decisions, writes Brian Daly.
The economy
We will shortly be entering into our second year of the post-IFSC era. The financial services industry in Ireland is now nationwide and subject to a single tax code regardless of its location. The transition from a special regime, to a nationwide tax regime, has been slow. The need for the transition was long flagged. It was quite capable of being tackled as a single suite of measures. Surely, the time has arrived to bring this process to an end and provide the financial services industry with the tax reforms that they require. These are not reforms that would cost money ‑ as the entire IFSC project has demonstrated, these are reforms whose delay costs money, and whose implementation generates extra taxes.
Brian Daly



The principal reforms needed are:

- Abolition of the technical charge to tax on Irish source interest paid to a non-resident.
- Changes to the disallowance of interest paid to a 75% affiliate, at least where the two companies are commonly controlled from a Treaty State, and a similar amendment to withholding tax requirements.
- Relaxation of ‘recovery of capital’ rules relating to relief for interest as a charge, where capital is deemed to be recovered by reason of unrelated banking transactions.
- Deduction for interest on tier 1 capital.
- Finally! Bring the debate on the trading status of SPCs to an end. This debate should never have occurred, and having commenced, should never have been allowed to continue. Our competitors in the Netherlands, Luxembourg, and Switzerland must be quite happy with the damage that it has done to Ireland.
This list is not comprehensive but it gives a flavour of some of the major items. There are additionally many aspects of securitisation where action is needed. The entire business sector look forward in hope to action to enable Preliminary Tax in respect of Corporation Tax to be calculated on known prior year results and not on attempts to forecast future profits.

And there is more!
- Implement the recommendations of the Report on Revenue Powers, fully.
- Cut administrative costs by ensuring that the base for PRSI and levies is income as computed for income tax purposes.
- Increase the limit at which residential property tax clearance certificates are required to €5 million, or indeed, abolish the requirement entirely.
- Reform the pattern of stamp duty rates, so that the higher rates apply to higher bands of value, and not to the entire amount once it exceeds certain limits. This is quite capable of being done on a revenue neutral basis. The application of the 9% rate to transfers of business assets (as opposed to residential properties) should be reconsidered.
- Abolish surcharge on intragroup dividends in close companies.
- Abolish the restrictions on car expenses and capital allowances.
- Abolish the remaining discriminations that relate to development land.
- Rethink the penal 35% rate of tax that applies in relevant contract tax (subcontractors’ withholding tax).
- Rethink the requirements relating to record keeping for VAT purposes on properties. These requirements are impractical.

Last year the ‘gross fund’ taxation regime, which had applied to funds and to life assurance products, was radically interfered with by imposing an eight-yearly tax charge on the accrued increase in value. This attempt to accelerate tax collection from the relatively unimportant group of Irish investors has imposed a considerable administrative burden on our international fund and life assurance industry.

If this eight-yearly charge must be retained, at least it should be entirely on a self-assessment basis, so that the internationally focused financial services sector is not harmed by entirely pointless administrative costs. Action here is needed not merely to remove those costs, but to give some reassurance to the financial services industry that the mistake has been understood by those who made it, and that similar thoughtlessness will not occur again. One cannot expect the financial services sector to develop in Ireland if it lacks confidence in the quality of decision-making in areas that can significantly affect it. That applies at every level of decision making ‑ ministerial, departmental, and Revenue.

The imposition of a deemed 3% payout from approved retirement funds, without regard to the age of the fund holder, and without regard to the adequacy of the fund to provide for future pensions or equivalents, should be re-examined. There is a lack of ‘joined up thinking’ here which has been evident in so many Finance Bill measures in recent years. What is the point of granting tax reliefs to those approaching retirement age, to put up to 40% of their employment income into a pension fund, if they will be penalised for failing to draw out of the same fund, the moment any part of it is transferred to an approved retirement fund? It is at present possible that a single individual might, on the one hand, still be availing of tax relief on placing up to 40% of his employment income into an approved pension fund while being penalised if he does not draw down from an approved retirement fund created in a previous employment. Would it not make more sense to apply the assumption that there is a 3% payout from an ARF only to those held by unit holders aged (say) 70 years or more, or to ARFs that exceed a particular limit (say) €5 million?

New strategic sectors?
The IFSC was promoted at a time when EU thinking on State Aids was not fully developed. An identical approach to the development of another sector is not possible for that reason. But that does not mean that another sector cannot be developed with equal success, and that the tax needs of that other sector may not be an important aspect of its development. The IFSC was born on the basis of existing skills in the area of banking, finance, accounting, and legal services within Ireland. The search for a new sector to develop would ideally focus on areas where we possess the necessary skills. Arguably, the area of writing and publishing; of film making and broadcasting; and of software development, are three areas where we possess significant reservoirs of skills. These are also ‘high value added’ areas without environmental downsides. Is it time to launch a study of what can be done to recreate the IFSC’s success in all three of these sectors, within the limits of State Aids rules?

At least one can avoid shooting oneself in the foot in these sectors as occurred in the last budget, with the envy-driven capping of artists’ exemption, something which could impact on the writing/publishing sector and on the film sector (scriptwriting can avail of that relief).

Clear up messes
Strenuous efforts were made by many tax advisory firms to limit the damage done by the interference with the remittance basis in the last Finance Act. The efforts proved fruitless with all suggestions being disregarded. The interference with the remittance basis was driven by narrow trade union concerns which were pursued without regard for the role of the remittance basis in economic development. A study should be done now of the significance of the remittance basis in attracting inward investment, and assisting indigenous industry to attract foreign talent. That study should be used as a basis for undoing the damage inflicted by the last Finance Act. At the same time, the unwise extension of gift tax and inheritance tax, to temporary secondees in Ireland, implemented several years ago as a short-sighted knee-jerk reaction to a failure by the Revenue to properly prove their case that an appeal hearing relating to gift tax, should be reversed or at least, reformed by being placed on a ‘remittance basis’ for non-domiciled persons.

Our power to use the tax system to develop the economy is significantly limited by EU rules. It is very frustrating to see those difficulties added to by poorly thought out domestic decisions.

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