Looking forward to the New Year

Jan 03, 2019

Sunday Business Post, 30 December 2018
Over the past few years, the key question about taxation has moved from “what” through to “where” via “how much”.  We rarely ask “why” anymore.  Today I’m setting out a few thoughts about what might happen to taxpayers and how much they will pay to the Exchequer during 2019, and why. 

Brexit

Brexit is now not so much the elephant in the room, as the room with the elephant in it.  No one, apart from the British, wants to go there.  There are two ways that Brexit will have an impact on tax yield.  

First of all, there is a direct correlation between economic growth and growth in tax yields.  If the Irish economy is impacted in a negative way by the U.K.'s departure from the EU, as almost everyone has predicted it will be, that means that tax yields will drop across the main categories of tax but primarily income tax, corporation tax and VAT.  That's not good news for a government that's seeking to balance its budget. 

Secondly tax is also the main method of enforcement for the customs union arrangements.  Customs tariffs and VAT protect against the abuse of the external borders of the customs union.  Not that there a tax bonanza to be had from tariffs on UK imports.  Most of customs duties collected across the European Union go directly to the coffers of the EU commission.  

Just before Christmas, we got the very welcome news that the United Kingdom will participate in the Common Transit Convention after Brexit, whenever that happens.  The Common Transit Convention is a way of minimising the customs paperwork when goods travel from one country to another.  Essentially it means that shipments will be declared to the revenue authority when they leave the factory or warehouse, and only subsequently checked when they reach their final destination, rather than at ports and airports.  

One of the main problems for the Irish economy arising from Brexit was Irish exporters having to bear a high cost for using the UK as a land bridge for exports to Europe.  Without the Common Transit Convention, there would have been checks on goods going into the UK and then leaving the UK.  Under common transit, goods from Ireland should simply flow through the UK en route to European markets.  That's also good news for Northern Irish exporters, many of whom export to the continent via Dublin.  

For most businesses, Brexit will be an exercise in managing new complexity.  Now that we know Britain will adhere to the Common Transit Convention arrangements, the amount of complexity to be managed is considerably reduced.  One important caveat though – the Common Transit Convention does not apply to shipments of all products, and therefore is not a panacea for all of our import or export ills.

The Corporation Tax thing (again)

Ireland has been a net beneficiary of changes in international tax regimes to date, as borne out by the surge in corporation tax receipts in the past two years.  Much is made of the volatility of these receipts, but fundamentally the corporation tax yield is a by-product of corporate profitability.  It is true that we rely extensively on a relatively small number of companies to pay the bulk of corporation tax in this country.  Nevertheless, the sectors in which most of those companies operate – high-tech consumer goods, information, telecommunications and financial services appear in rude good health.  These businesses are also less subject to the vagaries of trade disputes than more commodity heavy industries, like agri-foods or steel production.  While there is always a risk inherent in putting all the eggs in one basket, the particular corporation tax basket in Ireland seems to me to be a fairly robust one.

Contributing to its robustness is the roadmap for corporation tax reforms which government is currently pursuing.  Anybody making an investment needs to know what the likely yield is, and the tax take on that yield is a critical component in making business decisions.  Because future changes to the Irish regime to meet international norms and standards are well signalled in advance (and indeed some have already taken place) the country has given itself a competitive advantage when it comes to attracting investment.

One thing though which could upset the relatively smooth trajectory of corporation tax policy in this country is the outcome of the Apple state aid case.  I understand this is due to be heard in early 2019 but depending on the legal process the judgment could be pushed out sometime beyond that, possibly to the autumn.  There are several different ways of viewing the European Commission's case against Ireland but arguably the crux of the case is the entitlement of a domestic civil service agency to administer the laws of its country without subsequent interference. 

By winning the case, Ireland loses €13 billion but protects the reputation and integrity of the tax system.  If we lose the case, what is the price of reputation?  Those who want us to lose the case – the European Commission and our competitors – make strange bedfellows.  Also missing from this topsy-turvy equation is the impact of the US Tax Cuts and Jobs Act, now just over a year old, which among many other things ensures that tax on the kind of profits at issue in the Apple case ultimately find a home in the US Treasury.

Mere mortals

The talk of cross-border customs and multinational corporation tax is all very well, but what about the prospects for individuals paying income tax in this country?  The extension of the confidence and supply arrangement between Fine Gael and Fianna Fáil for one more year and one more budget at least suggests that the current income tax, USC and PRSI regime is not going to change significantly.  On the ground, a new system for collecting PAYE from employees kicks off in two day’s time.  The system is IT-based, so inevitably there will be problems.  Let’s hope there aren’t too many or January could be a bleaker month than usual. 

There are also prospects for a new system of local property tax.  Remember that our properties for LPT purposes were first valued back in 2013, in the nadir of the residential property market.  Values have recovered since, and that recovery will in turn trigger an increase in the amounts to be paid, as LPT is tied to the particular valuation of the house or apartment.  Signals from government are that LPT rates will be reduced to ensure that most people don't pay more in 2020 than they would have done in 2019.  All else being equal, there will be no change to the 2019 LPT bill over the amount you paid in 2018, and I don't expect to see much change in the amount to be paid in 2020, post revaluation, either.

And finally

The single biggest external influence on how we conduct our tax affairs is the European Union, and the European Union is getting a facelift and a makeover in 2019.  The existing Juncker commission will be disbanded, and a new Commission put in place with its own set of priorities.  Some of the current Commission’s priorities, like the idea of having a common tax system for companies across Europe, could drop off the table.  Other ideas, like a special tax on businesses reliant on the World Wide Web for service and content delivery and advertising, could come to the fore.  European Parliament elections will see at least two new Irish MEPs taking seats, as our seat entitlement has increased from 11 to 13 as the UK abandons its entitlement to European Parliament seats. 

All of the above is predicated on a reasonably orderly withdrawal of the UK from the European Union, whether under the terms of the current withdrawal agreement or by some other mechanism, or if at all.  With a no deal Brexit, all bets are off. 

Happy New Year.

 

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland