| Brian Daly considers some of the more critical matters which merit Minister Cowen’s focus in the forthcoming Budget. |
As our thoughts turn to Christmas wish lists, we also wonder what is in store in Budget 2008 on 5th December. We have recently seen much speculation on the extent of any forthcoming economic slowdown. While some indicators remain strong, IBEC’s Budget submission provides a number of statistics evidencing recent declines in Irish export rates and direct foreign investment which are directly related to the significant erosion of productivity and competitiveness. For instance, our increases in average unit labour costs have been more than double the Eurozone average over the past 3 years, whereas, Germany has recorded consecutive falls in the same period. Even the most optimistic economists accept that we are entering a somewhat slower phase in our economic cycle.
We cannot afford to spend time lobbying for changes on fundamental tax matters that should have been resolved long ago when focus is urgently required on imaginative reform that will foster new growth areas and restore competitiveness. I cannot stress strongly enough the need to bring an end to the transition from IFSC/Shannon tax regimes and get on with dealing with the very real new challenges ahead.
Urgent corrections
When the special regimes ended, financial services companies dealt with the increase in the corporation tax rate from 10% to 12.5%, the reduction in capital allowances benefits etc. However we all expected timely reform to provide the basic framework required to operate outside those regimes.
The reform required in relation to the treatment of interest payments abroad has been flagged many times. The Finance Act 2007 attempted to address this issue but the result was negative in some cases in respect of long interest and did nothing to improve the position in respect of short interest. While long interest paid to related parties in non EU/treaty locations is no longer deemed to be a distribution and is now tax deductible, interest withholding tax at 20% now always applies to such payments. Short interest paid to related entities in such jurisdictions continues to be deemed to be a non deductible distribution. All interest paid in the ordinary course of business should be tax deductible and should not suffer withholding tax as recognised by many jurisdictions. Although the need for amendments was accepted, the 2007 changes did not go far enough and we need final resolution of the issue this year.
 | | Brian Daly |
The technical charge to tax on Irish source interest paid to non-residents (where withholding tax does not apply) must be abolished for once and for all. This has the potential to damage the reputation of the Revenue Commissioners and Ireland as a location for note issuances and securitisations and its retention is, quite frankly, an embarrassment.
Other necessary reforms
Sound tax policy has been instrumental in the creation of a thriving securitisation industry. The Irish Securitisation Forum has warned of the mobility of securitisation business and the advancement of competitor regimes, including in particular the UK. They have requested action on several points.
Confirmation is required, either by means of legislation or interpretative clarification, that no VAT is chargeable on rating agency fees incurred until a common position is agreed at EU level.
Section 110, the key securitisation tax provision, needs to be amended to confirm that the holding of financial assets through a partnership should not disqualify a company from S110 treatment as the use of partnerships to hold certain types of financial assets which have been securitised is becoming more common place. Other jurisdictions disregard such partnerships, thus giving such structures full access to their securitisation regimes.
Removal of the unintentional application of close company surcharge provisions to securitisation vehicles is an easy step which would remove unnecessary concerns.
Widening of the definition of ‘qualifying assets’ and ‘financial assets’ to include items such as carbon credits and insurance policies and a stated commitment to consider what other assets should be included would be very useful.
The use of SPVs for the placing of large leasing transactions is now common. However securitisation legislation does not allow companies to hold equipment that is leased, but merely to hold the lease itself which means it may be preferable to securitise outside of Ireland. A simple amendment to allow the holding of equipment held for the purposes of a leasing business would suffice.
There is currently no unilateral tax credit relief available in respect of withholding tax on insurance or reinsurance premiums received by Irish insurance and reinsurance companies operating internationally. The introduction of such a credit would be an easy reform enabling us to attract business which is not currently carried out here, thus with negligible cost to the Exchequer.
Reform is urgently required in relation to the 8 year deemed disposal rules introduced which reduce competitiveness of Irish funds.
In relation to preliminary tax payments, the safe harbour of 100% of the previous year’s tax liability which currently applies to smaller companies should be applied to all companies so that no interest will arise if 100% of the previous year’s liability is paid. Current rules impose an obligation to predict final annual profits during the accounting period which is not easy to do. They then impose penalties for getting the prediction wrong. These requirements increase compliance costs and are unfair.
Further reform in the area of dividends by the introduction of a form of participation exemption is desirable. Corporates receiving foreign dividends are taxed at 25% with credit relief for overseas underlying tax suffered, while Irish dividends are exempt. The underlying profits of the foreign company would be taxed at 12.5% if operating here. This treatment is, in certain cases, at odds with the decision in the FII case at the European Court of Justice. While the current dividend pooling regime may give rise to effective exemption, the process of claiming credit is complex and off putting for international companies deciding whether to locate a holding company here and can be a hard-sell for tax advisors. Most other developed countries have implemented or are considering implementing an exemption system.
In the area of dividend withholding tax, we would call for an extension of the provisions, exempting dividends on American Depository Receipts (‘ADR’s) from withholding tax, to Global Depository Receipts (‘GDR’s). (Depositary Receipts are negotiable certificates that give evidence of ownership of a company’s shares). The ADR exemption operates on the basis of confirmation of the beneficial holder’s US address by the Depository Bank and similar arrangements could easily be put in place in respect of Irish share based GDRs.
The non tax-deductibility of interest on Tier 1 capital places Irish based credit institutions at a competitive disadvantage. Such interest should be deductible as a business expense.
In the income tax area, higher earners have seen little benefit from reductions in recent years. The 1% reduction in top rate income tax last year was countered by the half % increase in the health levy for those earning over ?100,000. Tax relief available from incentives has been significantly curtailed with the introduction of an effective alternative minimum tax. The abolition of the remittance basis removed our main incentive for attracting expatriates. It is interesting to note that the proposed reform of the remittance basis announced in the UK in recent days has taken the approach of effectively imposing a capped UK tax income liability on expatriates after they have been resident in the UK for 7 years and allowing remittance basis to continue on the balance. Calls have been made on the Department to allow a portion of salary above an appropriate level to be determined in an Irish context, and paid under a foreign contract, to remain taxable on the remittance basis to attract highly skilled employees. We reiterate this call.
Full indexation of tax bands, credits and the lower employer PRSI threshold should take place to help take home pay keep pace with inflation without further erosion to our competitiveness via pay increases. Reinstatement of the ceiling in respect of employer PRSI would also aid competitiveness.
Broader possible incentives
Innovative policies are required to attract and foster new industry and make Ireland’s plan to ‘move up the value chain’ more than a soundbite. The following is a non exhaustive list of areas to be examined and implemented where possible. Where the timeframe does not allow implementation this year, commitments could be given to focus on these issues.
Further improvement to the Research and Development (‘R&D’) credit system as documented in various pre-Budget submissions is essential.
The area of royalties remains in need of double tax relief legislation in the form of both unilateral tax credit and pooling provisions.
As outlined previously in Tax Monitor, reform is needed in the pensions area if we are to encourage not penalise those who are saving for retirement. We would urge the Minister to consider removing the penal tax rates applying to the excess of an individual’s pension fund over the pension fund threshold, to abolish deemed distributions in respect of ARFs which penalise retention of funds in ARFs and to replace the cap on earnings used as a basis for calculating the maximum allowable pension contribution with a limit on actual contributions.
We have also outlined in detail previously other areas where tax policy could generate new activity such as Islamic Finance and the environment. A carbon levy deals only with one part of the environmental issue. Measures are needed to incentivise the renewable energy industry.
The renewal of the Business Expansion Scheme (‘BES’) last year was welcome generally but a further increase in the limit of capital that can be raised from ?2million to a more realistic level of €5million should be considered as well as expansion of the types of business eligible for the relief and possible introduction of a venture capital scheme for investment in higher risk ventures.
Conclusion
The challenges facing us are not only economic but also tax competition and the push for some form of European tax harmonisation. But to effectively focus on these we must all be rid of baggage from by-gone eras and must not discourage new business for want of action on matters entirely within our control and without significant adverse Exchequer consequences.
At this time of year, wish lists should be confined to letters to Santa. In our view, if the above changes were made, this would help to sustain our industry and further advance Ireland’s economic development in the face of the real challenges we currently face. We trust therefore that the Minister will take action on as many of these issues as is feasible. |
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| Article appeared in the October 2007 issue.
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