all

Ireland faces tax shake up


Wednesday, September 16th, 2009

For 20 years Ireland was applauded as a model for how low tax rates can turn around a moribund economy.  Low personal and corporate taxes were acclaimed for creating the “celtic tiger” with low unemployment and rapid economic growth.

But that might be about to change for some Irish.  The recession has slashed tax receipts and forced the government to review the tax system.  The country is expected to earn tax revenue of €34 billion this year compared with €41 billion in 2008 and according to the OECD’s latest country report will have to cut spending and raise taxes in coming years.

The government appointed a Commission on Taxation in February 2008 to review the tax system and the commission’s report, delivered this month, makes proposals to broaden the tax base and make it less volatile, while being revenue neutral.  The corporate tax rate would not change from 12.5 per cent.

In the 560-page document, the Commission says reform will make Ireland less vulnerable to economic shocks, encourage enterprise and innovation and make the tax system fairer.

“One of our overriding concerns is the relatively narrow base of Ireland’s current tax system which makes it very susceptible to changes in economic conditions. Even falls in output much less extreme than those experienced in 2009 would, if sustained, generate large budget deficits. Over time these could challenge our ability to provide essential services and, in the extreme, could challenge our fiscal autonomy,” says the report.

The Commission acknowledges that some of its proposals are radical, such as an annual tax on residential property, domestic water charges, a carbon tax, and removing or limiting most of the tax breaks available, but says it is not possible to keep the status quo.

Over 230 recommendations include:
-    Introducing an annual tax on residential property
-    Abolishing stamp duty on share transactions
-    Reducing the tax on dividends
-    Easing preliminary tax rules for large companies and new non-corporate enterprises
-    Changing the treatment of capital expenditure for business
-    No tax on inflation-related capital gains
-    Introducing a carbon tax, with the rate based on the EU emissions trading scheme
-    A new tax model to encourage more people to save for retirement
-    Abolishing the health contribution levy and incorporating it into the tax system
-    Abolishing the national training fund levy
-    Further integration of the tax and social welfare systems
-    Tightening criteria for residency and tax exemption
-    Incentives for unemployed people to undertake training
-    Incentives to attract skilled migration
-    Domestic water charges to be phased in over five years
-    Taxing child benefit
-    The Pay Related Social Insurance system to be reviewed and changed


National taxes raised €41 billion in 2008, down from €47.5 billion in 2007. Estimated receipts for 2009 – including the income levy, a surcharge introduced this year – are approximately €34.4 billion.

Capital acquisitions tax applies to gifts and inheritances and capital gains tax to asset sales.


The Commission took the view that it was better to broaden the tax base so that a bigger group of tax payers paid low rates rather than a small group paid higher rates.  It says the government should look to property taxes, spending taxes (especially environmental taxes), and income taxes, in that order.

In moving towards an annual tax on residential property, the commission says the country needs to move away from undue reliance on stamp duties and other transactional taxes on property.  It has not proposed a rate for the tax but says an annual tax would provide a more stable revenue stream.  It says Ireland is one of the few countries that does not impose an annual tax on residential property and this revenue should eventually go to fund local government.

The Commission recommends that there be no stamp duty on people buying their primary residence but investment properties should be taxed and windfall gains from land rezoning should incur extra capital gains tax. 

The report now rests with the government to decide which recommendations to implement.  Since it was released earlier in the month, much of the comment has concerned the recommendation on taxing the child benefit.  The generous benefit can increase a family’s disposable income by 10 per cent according to OECD research.

Sources:
www.commisionontaxation.ie
www.oecd.org