The easing of the tax rules won’t last

May 11, 2020

Originally published in Business Post, 3 May 2020

In common with many revenue authorities across the world, the Revenue Commissioners are being asked to channel government cash supports through the pandemic to the businesses which can claim them.  The job however of Revenue is primarily to collect money, not to pay it.  A tax system cannot be liberal indefinitely.

Along with operating the wage subsidy scheme, Revenue have in recent weeks granted moratoriums on tax filing dates and tax payment dates, effectively allowing many smaller businesses to decide for themselves how much tax they are going to pay and when.  This isn't sustainable – somebody has to pay the nurses.  The wage subsidy scheme is time bound to 12 weeks.  There won’t be interest charged on late payments of VAT and PAYE which are due in May from many businesses but we don’t know the position beyond that.  Government will have to clarify if Revenue will be asked to extend these temporary but very useful measures as it outlines its recovery roadmap.

Concrete numbers on the impact of the crisis on the economy will be seen in the April Exchequer figures due to be published by the Department of Finance tomorrow.  Most of the tax collected in April typically comes from PAYE income tax on wages paid during the month of March.  Even these figures will only hint at the full story as we already know that the employment situation was worse and the impact of the temporary wage subsidy scheme was far higher during the month of April. 

Government has already signalled that the wage subsidy scheme itself could be tapered or finessed beyond the 12 week period already advertised.  Any adjustments could take the form of a blanket extension, or perhaps more effectively by refocusing it on those business sectors where employment is most affected in the crisis.  These sectors include the hospitality sector and the construction sector. 

This would be possible because the businesses in those sectors can be readily identified and also because the usual concerns over the EU State Aid rules if tax is being used to favour one industry over another don’t apply.  EU Commissioner Margrethe Vestager, best known perhaps in this country for her fascination with the tax affairs of Apple, last month arranged what in effect is a suspension of many of the usual State Aid rules until the end of this year.

The response to the Coronavirus crisis is stress-testing wider issues within the tax system as well. The use of tax havens at a time when governments everywhere are struggling for tax collection has been thrown into focus.  Both the French and the Danish governments are reported as blocking emergency supports and funding to companies registered in tax havens. 

The tax residency rules, which determine the taxability of an individual by reference to their location, or the taxability of company by reference to where the directors are located, are also being stretched by the contagion.  The issue of whether non-residents should be taxed has long been contentious here and led a few years ago to the introduction of the domicile levy.  This is a tax on wealthy Irish individuals based on their Irish business interests here as distinct from their presence here.  But is it right to charge taxes on individuals just because their flights have been cancelled?  Revenue have already introduced some temporary pragmatic workarounds solve these problems, but the new normal might well require a more permanent solution.

New taxes are often the by-product of crises.  The great recession of 2008 left us with local property tax and the universal social charge.  The global recession in the 1970s saw the introduction of capital gains tax, along with revised approaches to taxing inheritances and brand new rules for companies.  Income tax itself was originally conceived in the UK as a temporary tax to help fund the Napoleonic wars at the turn of the 19th century.  Once a new tax is invented, it tends not to go away.

A lasting legacy of the coronavirus pandemic could be some completely different form of tax.  This is difficult to do if only because governments everywhere through the ages have already figured out how to tax most things, leaving little room for new approaches.  Another possibility is the reform of existing taxes towards dealing with the consequences of the pandemic, and there are many precedents for this type of manoeuvre.   

One such precedent is the solidarity surcharge in the German system which is an additional fee on income tax, capital gains tax and corporate tax.  The solidarity surcharge is paid by every individual and company and it bolsters up the tax rates by 5.5 percentage points in each case.  It came about to help towards the cost of reunification of that country.  It remains an element of the German tax system almost 30 years after reunification was completed.  Surcharges like this should serve as a further warning to enthusiastic policy makers that it can be very hard to ditch a new tax.

As matters stand now however the Irish tax regime has never been more liberal in its administration of income supports, in its relaxation of some traditional rules and in its benign treatment of late payments.  None of these will last. 

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland