| Against a backdrop of unstable financial and property markets, it was important that the Budget did not create further instability or contribute to inflation. It succeeded in both of these objectives. That said, there were areas where it fell short of what is needed, writes Brian Daly. |
Certainty prevails
At the core of a business wish list for any Budget is certainty. Minister Cowen is to be commended in providing this, with a budget which included no changes of an inflationary nature. In the wake of economic slowdown, his decision to continue to roll out the essential National Development Plan, with a budget deficit funded by borrowings, rather than tax hikes, is praiseworthy. But has he done enough?
Business Tax
The main corporate tax change was a further increase in the threshold, under which smaller companies have the option to pay preliminary tax based on 100% of the previous year’s tax liability, rather than on their forecasted liability. This threshold has increased from €150,000 to €200,000.
While it is heartening to see the Minister acknowledge these concerns, I fail to see the logic of why the Department persists in thinking that it is easier for bigger companies to predict profits accurately when their business is usually more complex, and, particularly in the case of financial institutions, more subject to market fluctuations? It is time to recognise that big businesses do not have crystal balls either and that these rules are fundamentally unfair and significantly increase compliance costs.
Separately, film relief is extended on the current basis until 2012 and we hope for more positive developments in the Finance Bill, to restore competitiveness relative to the UK, following an ongoing review of the relief.
The Minister also extended the status quo in relation to R&D but generally, the lack of new business initiatives is disappointing.
R&D
The existing R&D incentive provides for an annual tax credit equal to 20% of incremental expenditure over the 2003 base year. It was given a boost with a further ‘freezing’ of the 2003 base year until 2013. However, it should never have been designed based on incremental expenditure, thus requiring companies to have ever escalating expenditure in order to benefit. An overhaul of the system to permanently remove the incremental concept would give more certainty and provide a greater stimulant to research activity. The Government says our future lies in being a knowledge-based economy. Our R&D regime needs to be at least on a par those of our European neighbours to attract such activity and this is not currently the case.
We need a package of measures including refunds of credits to loss making start up companies, reform of the double tax relief regime relating to royalties from intellectual property and provision for tax deductibility of amortisation of intangibles.
Employee costs
The raising of basic tax credits, the widening of the standard rate tax band and the increase in the lower employer PRSI threshold and employee PRSI ceiling were essential to help keep take home pay in line with outgoings, without further erosion of our competitiveness via pay increases. However the increases of approximately 4% do fall slightly short of estimated inflation rates.
The favourable remittance basis regime for expatriates, and people returning to Ireland after several years abroad, has never been available in respect of UK income and gains. Following queries from the European Commission, the Minister is removing this exclusion for UK income from 1 January 2008. This will open up UK investment products to some Irish based individuals, which would previously have been tax inefficient. The Budget announcement does not refer to removal of the exclusion of UK gains and we assume this will be rectified in the Finance Bill.
Likewise the UK Chancellor has announced the extension of the UK remittance regime to Irish source income. This is positive news for Ireland as a location for collective investment vehicles targeting the UK market.
Since the abolition of this regime in respect of employment duties carried on in Ireland in 2006, it is now only of real relevance to investment income and capital gains. Unfortunately, the Minister has not attempted to restore incentives for employment income and has not followed the UK approach to reform by proposing a capped income tax liability on expatriates after they have been resident in the UK for a set period (7 years) and allowing the remittance basis to continue on the balance.
In summary, basic indexation measures have been taken to curb declines in competitiveness due to employment costs. However, the lack of announcement of any plans to reinstate a system which will make Ireland competitive in attracting mobile intellectual capital i.e. some form of targeted remittance basis, is disappointing.
The Green Agenda
The initiatives aimed at promoting ‘green’ activity, include:
• Extension of the BES regime to provide easier access for recycling companies.
• Introduction of an excise tax on electricity from 1 October 2008 with exclusions for energy used by households, electricity produced from renewables and combined heat and power generation. This is required by the EU Energy Tax Directive.
• Measures to link Vehicle Registration Tax (‘VRT’) with carbon emissions levels rather than engine capacity from 1 July 2008. This will result in higher VRT rates, than currently, for higher carbon emitting vehicles and lower for ‘greener’ ones. Whereas rates range from 22.5% to 30% currently, depending on engines size, in future rates will vary from 14% to 36% based on emission rates. In theory, this should see the price of greener vehicles fall and that of others rise. The changes will only be relevant to new vehicles purchased, or any vehicles brought into Ireland, after 1 July 2008. The Minister said the change will be broadly revenue neutral. However, surely if the method does actually incentivise people sufficiently, VRT levels should fall?
• Reduction in availability of capital allowances and tax deductions for leasing expenses on business cars with higher carbon emissions (more than 155g/km) and abolition of these allowances and deductions on cars with emission levels of over 191g/km from 1 July 2008.
• Reduction in the VAT rate on supplies used for the agricultural production of bio-fuels to 13.5%.
• Announcement that the forthcoming Commission on Taxation will consider the possible introduction of a carbon tax.
• Announcement that Minister is looking at targeted incentives for business to support the installation of energy efficient equipment.
Such measures were undoubtedly necessary to attempt to meet EU commitments under the Kyoto Protocol, by virtue of which Ireland must reduce carbon emissions to no more than 13% above 1990 levels by 2012. An opportunity is being missed to use tax policy to positively incentivise the development of renewable energy however, such as the introduction of a tax credit type system, as used in the US, that would act as an incentive to financial services companies to put up capital, increasing the amount of expenditure for which the existing corporate tax relief is available etc. Also with reform of stamp duty on property afoot, it is surprising the Minister and his Green party colleagues didn’t look to the UK’s lead in introducing an exemption from stamp duty on new zero-carbon homes up to certain limits.
Plastic card boost
The Minister has, at last, reduced the penal stamp duty on credit and debit cards which should encourage more competition in this market, espouse a less cash oriented economy thus reducing financial crime and ease of funding to criminal gangs. Stamp duty on credit cards will be reduced from €40 to €30. Duty on ATM and Debit cards will go from €10 to €5 and on combined ATM/Debit cards, from €20 to €10.
There was no indication however that this will be the start of a process of further reductions and ultimate elimination of this counterproductive stealth tax though Irish banks face growing competition from foreign banks who can supply cards to the Irish market without such duties.
Furthermore the measure was counterbalanced by an acceleration of the payment dates of stamp duty on such cards with a payment on account due from December next year based on 80% of the previous year’s liability and a doubling in the charge on cheques/bills of exchange from 15 to 30 cents. The latter is baffling as it will encourage the black economy and reversion to cash based transactions for smaller services where providers cannot provide a card payment facility e.g. elements of the building, repairs trades etc.
Stamp Duty
Last but not least, the much longed for ‘countercyclical’ stamp change that has dominated the news. Whatever the state of the property market, the stamp duty system which applied the higher rates of stamp duty to the entire amount once the price exceeded certain limits was unjustifiable and probably created distortions which were masked by the unusually buoyant market conditions of recent years.
The Minister simplified the system to provide an exemption on the first €125,000 consideration on all purchases with just two rates applying thereafter; 7% on the excess over €125,000 up to a price of €1 million and 9% on any further excess. The reduction of claw-back periods from 5 to 2 years where properties, qualifying for owner-occupier exemptions are rented, reflects the reality of a mobile workforce who may need to relocate for career or personal reasons.
However 9% is still an extraordinarily high rate of transaction tax especially for the commercial property market where no reform was announced.
What he forgot
As usual, we hold out hope that some issues of a technical nature may be addressed in the Finance Bill. These include the final reforms needed to end the transition from the IFSC/Shannon tax regimes, such as the issues related to payments of interest abroad etc.
Calls for the reversal of the 8 year deemed disposal rules for funds and provision for tax deductibility of interest on tier 1 capital seem to have fallen on deaf ears. The Minister talked about saving for retirement, but ignored calls to review pension provisions introduced in 2006 which penalise those saving for retirement.
There are many broader areas where we campaigned for fresh thinking - widening of the securitisation regime, to include for example, carbon credits, introduction of a participation exemption for foreign dividends and profits from foreign branches, introduction of a venture capital type scheme or other reliefs to encourage much needed entrepreneurialism, including further increases to BES capital raising limits.
Stability is good but may not be enough. As competition for mobile inward investment intensifies, we hope the Minister will not let the Finance Bill pass without resolving well documented issues which are very important for the international financial sector in Ireland. |
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| Article appeared in the December 2007 issue.
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