Tax RoI

Sunday Business Post, 08 January 2019, And so, a New Year and a new tax.  That's according to the Taoiseach this week who wants to see a decision taken about carbon tax for 2020.  He says the carbon tax is an environmental tax that’s designed to change behaviour, and he thinks that the money that’s raised in carbon tax from households should be given back to households to compensate for the cost.   A tax which is not designed to take money out of your pocket might indeed be a new concept (the refund of the water charges two years ago doesn't count because that wasn’t an original design feature) but the notion of using tax to change behaviour is far from new. Old ideas only survive for as long as they work.  Irish economic policy has long been influenced by the notion that a judicious application or non-application of tax could result in desirable commercial behaviour.  Since the mid-1950s, we've been offering the lure of low corporation tax rates to attract investment and generate jobs.  In the 1980s, we breathed life into a moribund and dysfunctional property market by offering significant tax incentives to develop and provide residential accommodation.  We overdid that particular stimulus, but that's not to say it didn't work in bringing properties onto the rental market.  The paradigm behavioural tax is the plastic bag tax which almost overnight eliminated the blight of discarded grocery bags along Irish lanes and hedgerows. Using the tax system to change behaviours does not always have the expected outcome.  The property tax incentives of the 80s and 90s backfired because they were left in place for too long.  Their contribution to property price inflation was a significant factor in the malaise which ultimately led to the property collapse in 2007/08.  So harsh was this lesson that governments since then have ruled out widespread property tax incentives as a mechanism for addressing the current housing shortage.  Sometimes tax changes result in behavioural changes, but not in the way intended.  For example, there is a credible view that the successive tax increases on tobacco products have ceased to be effective in encouraging people to either quit smoking, or better again not start at all.  When tax drives prices too high, people will find alternatives and cigarette smuggling continues to be a problem.  During 2017, over 34 million cigarettes were seized, and this pattern continued during 2018 with the last reported seizure of contraband cigarettes being made just before Christmas.  Would additional carbon taxes increase the incidence of fuel smuggling? Nor is it just about the amount involved.  It seems to me the plastic bags tax worked not because just because people were jibbing at the additional 22 cent levy at the till, but because there was an element of optics involved.  People buying disposable carrier bags were seen to have more money than sense.  It is incongruous that hundreds of thousands of euros of expensive grocery items get carefully packed into mangled and tattered “bags for life” in shops and supermarkets every week, but the image is one of environmental consciousness.  Many businesses also supported the idea by providing alternative packaging for shoppers and this contribution was essential.  If the visible element is missing, a taxation change alone is unlikely to alter consumer behaviour.  So the Taoiseach's plan for a carbon tax involving a visible refund to households may have merit as a driver of behavioural change.  Any upfront tax refund is profoundly gratifying, but the quantum of the refund will be important too.  In a cash-strapped household, the view might well be taken that you'd buy a lot of loads of coal for the price of converting an oil based water heating system to solar power.  It could be a costly prospect to influence in a meaningful way patterns of car ownership, or home insulation programmes, or even public transport usage with carbon tax refunds. Most important of all however is the fact that while household behaviour is important in addressing greenhouse gas emissions, any change could be outweighed by the consequences of changing transport patterns and industrial behaviour.  According to the CSO, transport accounts for more than 40% of energy consumption in this country, with industrial and domestic consumption accounting for just over 20% each.  There are already significant tax incentives in place for industry of all types to invest in energy efficient equipment.  Businesses can write off the upfront cost of energy efficient equipment against their tax bill.  It may be far easier to change commercial behaviour with tax breaks than to change the behaviour of individuals.  Further developing the Irish carbon tax regime in 2020 along the lines proposed by the Taoiseach would raise consumer awareness of the issues.  It might even be reasonable to make a start with a campaign to highlight just how much carbon tax we are already paying in our fuel bills - €52.67 on a tonne of coal, €36.67 on a tonne of peat briquettes, and anything up to €61.75 on 1,000 litres of home heating oil.  However, in terms of making an appreciable difference to Irish greenhouse gas emissions, better consumer awareness even if via a tax refund is not the whole solution.  The role of business, both as energy suppliers and consumers, is crucial as well. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Jan 07, 2019
Tax

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

Jan 03, 2019
Thought leadership

“Welcome to Backstop Country” said my colleague when I called into our Belfast office last week.  Up to a few short months ago, most of us didn’t know what a backstop was.  Judging by the circus in the House of Commons this week, many British parliamentarians still don’t know what a backstop is.  At its simplest, a backstop is a physical barrier to prevent an unintended consequence.  Most backstops are created for practical reasons to protect against accidents.  The Brexit Withdrawal Agreement backstop is not like that.  Rather it is a child of mutual distrust. A Brexit Withdrawal Agreement is needed because the Article 50 mechanism, the legal process by which any country may leave the EU, is not providing sufficient time to unravel over 40 years of cooperation between London and Brussels.  That 40 years of cooperation, expressed in formal treaties, agreements to collaborate and even unformalised mutual understandings has to be replaced by some kind of deal.  Article 50 allows for two years to sort matters out in the first instance.  The Withdrawal Agreement in effect extends the sorting-out period until December 2020, or a little further if necessary.  In the absence of good and proper sorting out, the backstop arrangements take over. The backstop exists because neither the EU nor the UK trusts the other to sort out arrangements on the island of Ireland to ensure there is no border.  Because the Northern Unionists don’t trust the UK government, the backstop arrangements have to cover not only Northern Ireland but also Britain.  In that way, Northern Unionism apparently thinks it can ensure that there won’t be a border down the Irish Sea.  Because the EU doesn’t trust the UK to deal adequately with the north-south border, Brussels is insisting that the UK cannot leave the backstop unilaterally.  Because the UK does not trust Brussels, Prime Minister Theresa May cannot get her Withdrawal Agreement through Parliament.  And because in international trade talks, nobody trusts anybody, the UK will not be able to negotiate its own trade deals until the backstop is finally resolved.  Yet again, Donald Trump is right.  No country could negotiate trade deals in good faith with the UK until it is clear where the U.K.’s own trade borders start and stop. The only redeeming Brexit development this week was the creation of another mechanism for the British to defer the inevitable.  Before Monday, there had been just two mechanisms available to the British political system to defer the hard decisions on the Irish border.  One was to enter into the Withdrawal Agreement.  The other was to approach the European Council for a two-year extension on Article 50.  Now the much maligned European Court has offered Britain a third way, which is to unilaterally rescind the notification to withdraw.   The trouble is that the UK political system could be offered a dozen more ways to delay or defer, but at present is totally unable to seize any of them.  No one it now seems, not even the Prime Minister despite her victory this week, has any power to make decisions.  No one has taken back control. Can this circle now be squared?  A hard border cannot be avoided on the island of Ireland unless both sides of the border participate in the EU customs union (and ideally the single market).  To do so, Britain would have to surrender what it perceives as one of the key Brexit advantages of independent trade negotiations.  The backstop is being spun as an Irish problem by some politicians and commentators.  It is not an Irish problem.  Were it not for the British decision to leave the EU, “backstop” would not even be in the political lexicon.  The need for a backstop won’t be solved by 29 March 2019, if ever.  Therefore Irish businesses north and south must now prepare for hard Brexit.  Many have already done so; those who have not will have to start.  Business is resilient, but these challenges are different to the challenges posed by the great recession a decade ago.  When money is tight, business can cut costs and margins and prices and hopefully survive in a difficult market.  The 2008 recession closed off money supply, but Brexit will close off markets.  There are two things the Irish government can do which are now of critical importance to Irish industry.  The first will mainly assist Irish exporters.  The Common Transit Area arrangements, which among other things allow Irish industry to export to the continent using Britain as a land bridge, must be preserved.  The Common Transit Area is a separate arrangement to EU treaties, and its continued operation will be critical to Irish exporting business.  It won’t solve all problems – for instance it doesn’t address live cattle exports – but it will help.  The second measure will help Irish importers from the UK.  We need a system to defer the payment of VAT on imports, so that much of the upfront tax cost of future imports from the UK can be spread over the trading year.  That won’t eliminate the tax, but it should make the process a little less unaffordable.  It can be introduced unilaterally by Ireland, and it already exists in many other EU countries. Northern Ireland may well be backstop country.  That has implications for all of us, North and South. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Dec 17, 2018
Tax

Sunday Business Post, 9 December 2018, It’s tough to make predictions, according to the great baseball player Yogi Berra, especially if they are about the future. Nevertheless, predictions are critical to the management of a business.  Every business uses budgets and forecasts, and governments do the same.  That’s why the announcement this week that tax receipts in the eleven months to November of this year are substantially ahead of forecast is both good news and bad news.  Good news, in the sense that government will have sufficient funds to meet its expenditure commitments in 2018, and with some cash to spare.  Bad news, in that the forecasting process is so far off the mark.  An under forecast is almost as bad as an over forecast because it prevents the government from allocating funds which might be usefully spent or invested. The main culprit in the inaccuracy is in the forecast for corporation tax yield – the amount of tax companies paid to the Exchequer on their profits and gains.  The corporation tax yield is running almost 20% ahead of the amounts estimated at the start of the year.  As a consequence, the ratio of corporation tax to all of the other taxes collected is unusually high by the standards of developed economies.  In most OECD economies, corporation tax accounts for about 10% or less of the total taxes collected.  In Ireland, almost one euro out of every five collected this year was paid by a company as corporation tax. The reliance on Corporation tax has already been identified by the Irish Fiscal Advisory Council as potentially problematic, and the volatility of corporation tax receipts has been a matter of debate for the past several years.  But if companies are preparing their own budgets and forecasts, how is it that this rigour at a business level does not transfer to the forecasts for national tax receipts.  In short, why is Corporation Tax so volatile? One reason is that relatively few companies in Ireland pay corporation tax in significant volumes.  Most companies in Ireland are small, and are often owned by a number of family members who pay out the company's profits to themselves as salary.  It isn't smart for them to leave profits in the company which are subject to corporation tax, and then suffer income tax on whatever balance remains when it is paid out by way of dividend.  According to the Fiscal Advisory Council, two in every five euros of corporation tax paid comes more from just ten firms.  If any one of those companies has a bumper year, that will have a disproportionate effect on the nation's tax yields.  How companies calculate their profits is also important.  For instance, this year there were changes in the way companies account for monies they receive under multi-year contracts.  That particular change in the accounting rules seems to be the reason for some of the corporation tax uplift at least.  Less mundanely, there should be a correlation between the numbers in employment and corporate profits.  The significant jobs growth of recent times should now be translating into better company results and therefore more corporation tax being paid. While the 12.5% rate of corporation tax is low, it is also largely unavoidable despite the bleating of its critics.  For many years companies have been unable to shield taxable profits by investing in their factories and production lines.  The only tax shelters of any consequence available to them is investment in research and development, or investing or developing intellectual property – patents, licences, know-how and the like.  Revenue don’t even wait for the company to earn the money before taxing it.  The larger companies pay tax at six monthly intervals based on estimates of what they will make.  The supermarket chain where you will do your Christmas shopping in the next few weeks may well already have paid its corporation tax on the profits it hopes to make this month. Then we must take account of the way tax receipts across the economy are estimated.  There is evidence that generally speaking, tax revenues increase in a fixed proportion to economic growth.  This proportion is important, but is more accurate when applied over a period of several years and is therefore not completely reliable when predicting one year.  It is even less useful in in predicting the composition of the tax yield – how much comes in via income tax, VAT and so on.  The pattern of tax forecasts versus tax outcomes over the past few years suggests that it is easier to get the tax forecasts right in a period of recession than it is during a period of growth.  However this pattern has been broken.  Brexit uncertainty, the doubts over how Foreign Direct Investment will be impacted by trade war posturing, and the effect of the US Tax Cuts and Jobs Act must be added in to the mix of variables.  Economists have a good handle on the links between general economic activity and tax yield, but the impact of tax policy on business decisions (and hence profits and tax receipts) is not well understood. A few years ago, who knew that the biggest beneficiary of a global clampdown on cross-border asset transfers by companies to avoid tax would be Ireland?  It is indeed tough to make predictions. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Dec 10, 2018
Tax RoI

The Sunday Business Post, 2 December 2018, The idea behind the Irish name Aer Lingus is that of a fleet or convoy for the air.  There is strength and safety in convoys.  The idea behind the name of the German national carrier Lufthansa, is the same.  The German word Hansa which originally meant “convoy” has come back into a different type of usage in recent times with the notion of the formation of a new Hanseatic League.  So dubbed by the Financial Times, the new Hanseatic League is an alliance of EU countries, a club within a club, to defend regional interests and economic priorities.  It comprises eight countries - the Netherlands, Sweden, Finland, Denmark, Estonia, Latvia and Lithuania.  And Ireland. This informal grouping is not a superpower.  With a combined population of some 50 million, it accounts for about 10% of the total population of the European Union.  This is a key statistic when we consider the importance of the qualified majority vote in EU politics.  Unanimity is not required for many EU decisions (including last week’s EU Council decision to ratify the Brexit withdrawal treaty).  Instead all that is required is a qualified majority – the votes of EU countries which when combined represent 65% of the EU population and more than half the countries.  This new Hanseatic League will never be able to achieve such a majority on its own, nor for that matter block a qualified majority vote. Nevertheless, its formation echoes the ideas behind the original Hanseatic League, which was an alliance of cities in Northern Europe which formed around the 12th century and flourished for the best part of 300 years.  The cities of the Hanseatic League came from several of the modern EU states including Belgium, Germany, the Netherlands, Poland, Sweden and the UK.  If the cities didn't share nationalities, they shared proximity to a vital trading corridor stretching from the English Channel along the north coast of mainland Europe towards the Baltic Sea.  Their operating premise was simple.  Cities and towns which signed up to the Hanseatic League agreements on taxes (what else) and trading conditions could trade with each other, to the exclusion of other cities and ports along the Baltic route.  It seems that the original Hanseatic league was born out of instincts for self-preservation and the pursuit of profit. Its modern counterpart has similar instincts.  It may be unofficial, but nevertheless it is recognised as evidenced by the Tanaiste some months ago when speaking in The Hague about Ireland's newfound allies within the European project.  He has “some confidence that the views of our Dutch, Irish and Nordic/Baltic cluster will be heard with increased frequency and effect in our European Union of the future”. I hope that the Tanaiste’s confidence is well founded because this country needs as many allies as it can get.  Aside from the economic consequences of Brexit, there are political and diplomatic consequences to losing one of the most powerful members of the EU, whose interests coincided with Irish interests, certainly in the tax arena.  The UK was always deeply sceptical of European Commission mission creep, manifested in intrusive state aid rules and decisions and in projects like the EU drive to harmonise corporate taxes across the EU.  That British scepticism meant that Irish interests were frequently aligned with UK interests.  You don’t need to be a diplomat to appreciate that it's always useful to have a G7 nation with nuclear capability on side.  Brexit means Ireland loses a key supporter at the EU negotiating tables.  The new Hanseatic League is no substitute, but will it have any effect?  One indication of how effective it could be presented itself last month when it was reported that the French foreign minister Bruno Le Maire complained about the negative effect, as he saw, of the new Hanseatic League’s opposition to some of the grander French notions for the EU.  The new League may be small, but it may turn out to be effective. The dust kicked up by Brexit has obscured many things.  EU support for Irish concerns over Brexit doesn't solve underlying Irish problems with several of the ongoing EU Commission projects.  It's important to remember that despite Brexit, the “business as usual” of EU membership continues for the remaining 27 EU member countries, even though it doesn't feel very much like that at present.  I'm writing this column today from Brussels, where judging from the various events and engagements I’ve been attending in the Parliament and elsewhere, it is apparent that UK influence is already in decline.  The British may be leaving on 29 March next, but we are staying, and staying with overwhelming public support for Ireland’s continued membership of the EU.  That however doesn't mean that we won't have to continue to fight our corner with our European counterparts, and that will now have to be done without a former key ally.  We need to be making friends wherever we can, as we do by entering into new alliances with medieval names.  Whoever named Aer Lingus or Lufthansa had a keen sense of history.  So too it seems does this new Northern European League. Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland

Dec 03, 2018
Tax RoI

The Sunday Business Post, 25 November 2018 The Irish tax system is full of shortcuts.  It has to be, otherwise nothing would work because the rules are so complicated.  The PAYE system itself is a form of shortcut.  Instead of asking individual employees to declare and account for tax on the income they earn every year, the employer is asked to do it on their behalf instead.  The good news this week that over 2.3 million people are now in employment in Ireland further justifies this kind of common sense approach.  Which is why Revenue's decision to build a wall across the PAYE shortcut of the flat rate expenses regime is at best puzzling. This flat rate expenses regime for PAYE workers isn't a giveaway or a concession.  It is a way of reflecting the reality of the situation of workers while short-circuiting some of the paperwork involved with their tax affairs.  According to the Taxes Acts, everyone is entitled to reduce their taxable income if they have to pay money out in pursuit of their employment.  The conditions attaching to any reduction are understandably difficult to meet.  Rather than have Revenue dealing with a myriad individual claims, a flat rate arrangement, with differing deductions for different types of worker, was brokered with various representative organisations and trade unions over the years.  Most of these deductions are modest.  A few however such as those for doctors, nurses, school principals, miners and some employed musicians are quite substantial - €600 or more. The news, broken in this paper last week by Colette Sexton, that Revenue were undertaking a review of the flat rate expenses regime came as a surprise to almost everyone.  Revenue claim the review is in the interests of good governance, but good governance is rarely signalled by a lack of transparency.  The initial outcomes of the review suggest that “review” actually means “removal”.  Revenue are of course within their rights to review any administrative arrangement they make.  That right is reconfirmed every year within the annual Finance Act which places taxes under the care and management of the Revenue Commissioners.  This column has in the past defended some of Revenue’s difficult administrative arrangements, for instance, when pensioners were being pursued for under declaration of their state pension entitlements, and when a mistaken understanding of an administrative arrangement formed the basis of the EU Commission's State Aid case concerning Apple.  The blanket revision of the flat rate expenses regime isn't as easy to defend.  That's because people with legitimate entitlement to a deduction will in practice find it very hard to have it reinstated for their own particular circumstances.  Individuals can make claims, but such claims have to be accompanied by a return of income and will inevitably result in protracted correspondence with Revenue without any guarantee of success.  The removal of the fixed rate expenses for any particular category of employees will generate the kind of administrative difficulty the system was designed to avoid. I suspect that most taxpayers affected by the change simply won't bother engaging with Revenue.  Many of the workers affected are in relatively low paid jobs in the services sector.  They aren’t used to dealing with Revenue, and won't be receptive to the niceties of tax administration changes by reason of good governance.  The first thing they will see is a reduction in take-home pay, for which the employer will most likely be blamed. As a consequence of one of the recommendations of the Moriarty tribunal, the political system is prevented by law from interfering with Revenue decisions concerning taxpayers.  Despite the Dail debates this week there is actually nothing the political system can do about this decision to review flat rate expenses.  When the Taoiseach told the Dáil that the changes would not have effect until 2020 rather than January of next year as earlier reported, he was relaying a decision of the Revenue Commissioners to the TDs.  The consequences of this review may be deferred, but the review is still taking place. The current debacle therefore highlights a more fundamental question about the nature of the relationship between the revenue collection agency of a country and the political system which governs it.  There are clear advantages to drawing a sharp distinction in law between the two, not least because the elected representatives of taxpayers may be the worst people to ask about how the tax system should be operated.  Nor can an Oireachtas member take their seat without a tax clearance certificate. On the other hand our political system cannot challenge administrative decisions regarding tax collection which are ill advised, or at best ill-timed as the deferral of the flat rate expenses review outcome to 2020 suggests.  Revenue have a difficult job to do, which they generally do well and without any need for interference.  However if their goal of administrative perfection dilutes the good of fairness and equity, particularly if a vulnerable cohort of taxpayers is involved, then there should be legal safeguards and mechanisms to ensure that someone in elected government has the authority to cry halt.  It shouldn’t be left to the newspapers and radio stations to report the public outcry.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Nov 26, 2018
Tax

Sunday Business Post, 18 November 2018 The withdrawal agreement for the UK's exit from the EU may have the the recommendation of the EU Commission but only has a grudging, resignation plagued endorsement by the British cabinet.  Irrespective of whether it is voted in, or left to wither on the diplomatic vine, or even if it prompts changes of leadership or changes of government, one thing is certain.  It is the most coherent statement to date of just how much worse off we all are following the Brexit referendum.   The Taoiseach is quite right in his assertion that the withdrawal agreement represents progress from the mere political statements of intent arrived at in December 2017.  Yet in common with the declarations a year ago, it does not have the force of law, at least not yet.  Whether British or European, we are all still worse off than we were on 28 March 2017, the day before the formal notification by the UK that it was to leave the EU.    Many of the politicians speaking in the House of Commons on Thursday in reaction to the withdrawal agreement have claimed that it is unacceptable.  Labour, the DUP, the SNP and backbenchers of various hues can identify their own reasons for dissent, even if some of the parliamentarians seem not to have actually read the agreement.  Either that or what was on display in Parliament was a breath-taking ability to assimilate over 500 complex pages of legalese overnight.  Their claims are valid, but their rationale is not correct.  It is the outcome of the Brexit referendum which is unacceptable, not the withdrawal agreement.   Let's look at what the withdrawal agreement takes away.  It removes the right of the UK to have any say or give any political direction to the EU in exchange for retaining the rights and benefits of EU membership until December 2020.  The UK’s position within the EU, albeit for a limited period, will be analogous to the treatment of its provinces by Rome when it was at the height of its empire.  The provinces could rule themselves, as long as they paid tribute and left the big decisions to the Emperor.  Nothing more clearly reflects the political damage done by the referendum outcome that this arrangement is the least bad option, both for the UK and the EU.    The transition period provides time for frenzied attempts to be made at arriving at a future trading arrangement.  Those attempts will be frenzied because the UK can't begin to enter negotiations with other putative trading partners until the extension period expires, being 31 December 2020 at the earliest.  That's one of the obligations of being in a customs union with the EU.  It is a certainty that no meaningful trade talks will begin between the UK and any other trading nation until after 29 March 2019 or, if the withdrawal agreement survives, 31 December 2020.    Trade negotiations take time.  The EU has been trying to forge a new trading relationship between itself and the US called the Transatlantic Trade and Investment Partnership.  Those negotiations commenced in 2013 with a US administration which perhaps was more benignly disposed to international trade conventions than is currently the case.  After five years, there may have been some progress but there are no agreements.  This experience suggests that after the transition period expires, the restricted form of customs union which the UK could have with the EU via the backstop might be the best arrangement the UK will have with any other trading partner for several years beyond that.   The backstop arrangement featured prominently in the Westminster debates this week, and indeed in the resignation letters of the ministers who resigned.  From a UK perspective, no matter how unpalatable the transition period might look, the backstop arrangement is even worse.  It is something which would have to be avoided, not least because if it were ever to take effect, the UK cannot unilaterally pull out of it.    The backstop, which is a default trading arrangement between the EU and the UK should all else fail, is designed to eliminate the requirement for a hard border on the island of Ireland.  Should it ever come to pass, the backstop trading relationship between the UK and the EU will be comparable with the relationship which currently exists between Turkey and the EU.  If you think that arrangement might result in frictionless trade, take a look at what happens at the border between Turkey and Bulgaria.  Free movement of goods doesn’t necessarily mean free movement of lorries.   The political events of this week mean that for business, little enough has improved.  With or without the withdrawal agreement in its current form, businesses must continue with their Brexit preparations.  Withdrawal agreement or not; the ability to provide frictionless cross-border transactions from the UK to the EU will be at least diminished after 31 December 2020 and possibly even after 29 March 2019.    While the worst concerns on the free movement of goods will be ameliorated if the withdrawal agreement is ratified, we will still only have clarity up to 31 December 2020.  Beyond that, we will either be dealing with an extension to the transition, or a new trading environment, or a backstop environment.  And if the backstop happens, difficulties with goods shipments will remain because of the standards imposed by the single market rules.   Whatever the political outcome, this week’s withdrawal agreement does give some grounds for hope.  In particular the greater level of flexibility which has been demonstrated by the EU in relation to the backstop and the ongoing commitment to avoid a hard border are encouraging. But there is still little good news on Brexit for anyone this week.  Instead we have been reminded in the starkest terms of all the difficulties it has created and what we have all lost.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Nov 19, 2018
Tax

Sunday Business Post, 11 November 2018, This week's US mid-term elections were a useful reminder that they do things differently over there. The US system of governance may well be better overall. How much more focused would an Irish government be if there was a prospect of losing a core part of its support from elected representatives midway through a Dáil term? Governance at other levels of the US system is different too. For instance, Stateside, they have an office called the Taxpayer Advocate. It's a role which could be compared to that of a special ombudsman for taxes. The current incumbent, Nina Olson, is vastly experienced and has a lot of interesting things to say generally about the way taxes are administered, and not least about the role of technology in so doing. Ms Olson's thesis is that even as we use technology to facilitate the calculation and collection of taxes, we distance the taxpayer from the ever increasing complexities of the tax system and thus from an awareness of the law itself. It's not good enough to create a system so complicated that technology has to be used and without which there would be no prospect of the taxpayer being able to comply with their obligations.  It seems though that Ms Olson’s warning goes largely unheeded.  Technology doesn’t just facilitate administrative processes.  It is now becoming an excuse for politicians and administrators to make poor decisions. This will be more evident than ever when businesses are forced to pick up the pieces of the administrative complexity that Brexit will create.  Bureaucracy cannot be just automated away.  If the reports and counter reports of the Brexit negotiation process illustrate anything this week, it is that no matter what deal is done, there has to be a border somewhere between the territory of the UK and the rest of the EU. The key issues now are how long the establishment of that border can be deferred, and where parts of that border might be situated. There is little comfort to be had for the Irish cause in any of this week's reporting.  The British can't live with a border within the United Kingdom.  The Irish can't live with a border on the island of Ireland.  A long standing concern of Unionists in Northern Ireland is that border back stop arrangements might in some way distance Northern Ireland from the rest of the United Kingdom. There is a risk now that someone could dream up border back stop arrangements which would distance Ireland from the rest of the EU.  Could Ireland be obliged to maintain some kind of border controls between the island of Ireland and, for want of a better expression, mainland Europe?  If so, we could lose many of the EU membership advantages of free flowing trade because of additional monitoring despite remaining within the customs union and single market.  That must not happen. The EU principle of free movement of people is not controlled at ports, airports and border crossings within the EU, but rather at social welfare offices and health centres and by employers.  Similarly the principle of free movement of goods, both for customs and single market purposes, may have to be controlled at Irish business premises rather than at customs checkpoints. The UK government has already issued directions to business that if there is a no deal Brexit, UK businesses must in essence register as customs operators, and maintain and operate what are de facto customs warehouses on their own premises. It's a short conceptual step from there to any government imposing further additional single market controlling obligations on its own industries.  Enforcement of regulations on packaging, labelling, certification of quality and the like could all happen on the premises of manufacturers and wholesalers, importers and exporters – wherever best it suits a political Brexit border settlement. That would be a significant overhead for business.  Such controls would have to be sustained via a heavy investment in information technology infrastructures, and it is not apparent that such investment would be made by government.  For instance on the UK side the planned upgrade to the UK's customs systems might not be ready for Brexit purposes, partly because the design had commenced before the outcome of the referendum was known. That’s according to the UK's Comptroller and Auditor General. And on the Irish side even if the Irish Revenue does increase its manpower by 20% to provide for an adequate number of customs officers, that investment won't necessarily help Irish businesses deal with the increased regulatory burden. The focus of those additional Revenue resources would surely be on tackling smuggling. In the flurry to achieve a politically acceptable Brexit settlement, there is a significant danger that the outcome will be commercially unacceptable to business on this island.  The trade protectionism that Brexit necessitates, both for the EU in securing the Customs Union and for the UK if it is to negotiate its own future trade deals, is enforced by taxation at borders.  Unlike in the US with the Taxpayer Advocate Service, we seem to have no one within the government structures to highlight the implications for taxpayers of political decisions like these. We might not choose to follow the US example of mid-term elections, but to have an officer like Nina Olson to take a broader perspective on the burden for taxpayers looks increasingly necessary. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Nov 12, 2018
Tax RoI

Sunday Business Post, 4 November 2018 Just last week, two of the most senior executives from Apple and Facebook addressed a conference in Brussels about data privacy.  Their comments received limited attention.  But had they been talking about tax, both the CEO of Apple Inc. Tim Cook and Erin Egan, Facebook's Chief Privacy Officer could have been guaranteed headlines across the world.  The kind of headlines UK Chancellor Philip Hammond did attract when he mentioned in his budget speech how the UK was going to tax companies like Apple and Facebook in the future.   Hammond is proposing a 2% tax on revenues derived from search engines, social media and online marketplaces.  Before anyone loses the run of themselves, such a tax will only be imposed from April 2020, and then only on the very largest companies, and even then only on revenues derived from their businesses in the UK.  The UK government budget papers estimate that the new tax will bring in approximately £400million.  That’s not a small number, but remember that the UK currently collects annually somewhere in the order of £600billion sterling in total tax each year.  In that context £400 million is a flea bite, and slightly less than how much Hammond is proposing to devote to fixing potholes in minor roads in the fiscal year 2019.   Of interest and alarm to the likes of Ireland is the direction that UK tax policy on high-tech multinational enterprise is taking.  The EU has also put forward proposals for a digital tax, and the concept is high on the agenda of the OECD.  The philosophy behind a digital tax is that it moves the collection of tax away from the country where products are being created to the country where the user or consumer of that technology is located.  There is also the consideration that multinationals seem to be able to locate their profits in countries where the tax burden overall is lower, and thus avoid tax in a way not available to smaller indigenous businesses.    For a country betting its post Brexit future on its ability to forge trade deals and alliances with countries outside of the EU, the timing of Hammond's announcement is somewhat unusual.  Just a few days before the UK budget was announced, the US Treasury Secretary Steven Mnuchin issued a statement on digital tax proposals.  He noted the “strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies” and cautioned against any partner country taking unilateral action in this area.   By that measure, the UK's latest announcement on digital tax seems to fly directly in the face of the interest of a vital trading partner in a post Brexit era.  The reasons for the US concern are obvious.  Most of the biggest digital companies are US-based, for the moment at least.  Every time a US company pays more tax in Europe, the share being paid to Uncle Sam shrinks.    None of this is particularly good news for the likes of Ireland or indeed our allies in the smaller nations of the European Union.  We are supposed to be part of a common market, and common markets shouldn't favour one country over another based on market size.  Talk of a digital tax harms the attractiveness of any small economy, low tax or otherwise, as a locale for foreign direct investment.  The current EU digital tax proposals, far from adding to Irish Exchequer receipts, would actually cost us money – about €100m or so. This is according to Revenue evidence, albeit with several health warnings, presented to the Committee on Finance, Public Expenditure and Reform and Taoiseach in the early summer.    These pressures prompt political decisions.  Are we in Ireland to succumb to the EU insistence to accept the Commission’s digital tax proposal?  Some reports suggest the pressure is growing.   If Ireland because of its small market size is going to lose out because of shifts in international tax policy, do we prefer to count that loss in corporation tax revenues or in jobs?  Over 25% of our employment comes from the multinational sector.  We saw this week that unemployment levels have settled at a 10 year low.  That is one statistic worth preserving.    But can we continue to resist the European momentum towards tax harmonisation without the support of a traditional ally against such momentum, the UK?  And if we fail without the support of the UK at the first time of asking, how does that affect our capacity to resist other EU tax policies which would damage our economic model, such as the Common Consolidated Corporate Tax Base or the Financial Transactions Tax?   Perhaps digital taxes, if introduced, will have little distortive impact cross border investment.  The Hammond plan with its modest revenue targets lends credence to that hope, but the truth is that no-one really knows because there is no precedent we can follow.  More broadly, because digital taxes tend to divert tax into countries with the biggest markets, aggressive approaches to taxing high tech industry would push corporation tax revenues into the likes of Brazil, India and China.  That prospect, coupled with Secretary Mnuchin’s warning, should also give European policy makers pause for thought.   In the high tech debate, important issues such as consumer privacy come a poor second to the developing row over where that industry should pay its taxes.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Nov 05, 2018
Tax RoI

Sunday Business Post, 21 October 2018 Almost anything can be studied.  One of the latest topics to attract the attention of researchers is why tax is so complicated.  A team working mainly from the University of Paderborn in Germany has recently devoted quite a lot of time and effort into establishing what makes life so difficult for taxpayers.  Some of the factors are obvious – how complicated calculations are, or how incomprehensible the law is.  The researchers also considered issues which may be less obvious.  For instance, how much documentation does a company have to keep to stay on the right side of the tax authority?  How often do tax returns have to be made, and how detailed do those returns have to be?  Also they suggest there are two drivers of complexity which are firmly in the hands of the politicians.  These are unpredictability, and closely aligned to that, the extent to which tax rules change each year. The big tax change in the Irish context is the annual Finance Bill.  The 2018 edition was published last Thursday.  It’s the piece of law which gives effect to the budget day announcements.  If budget day is all about income tax and USC changes, the Finance Bill is more about the drivers of complexity – the rules behind the calculations, the filing requirements and the legal obscurity.  Mercifully, this year's Finance Bill is unusually short.  Measuring this year’s Finance Bill by reference to the University of Paderborn study, the system has become considerably more complicated for companies.  There are new rules to prevent companies from avoiding taxation simply by virtue of moving their operations out of this country.  There are also new rules to dissuade companies from setting up subsidiary operations in other territories solely for the purposes of avoiding tax.  Part of the tradeoff for a 12.5% corporation tax rate is a high compliance cost for companies.  Much of this compliance cost is driven by the need to conform with the international standards promoted by the OECD and the EU, rather than solely by the domestic concerns of the Revenue Commissioners.                                                    Were it not for all the compliance obligations, our system of taxing companies is fairly straightforward.  The tax systems in many other countries have high rates, accompanied by a whole slew of allowances and reliefs to help ensure no-one pays tax at those high rates.  The situation for Irish companies is radically different, in that there are really only three corporation tax reliefs.   One is for investment in research and development, one is to encourage the manufacture of products derived from know-how developed in Ireland (the so-called Patent Box), and a third to help small trading companies in their early start-up phase.  That's pretty much it.  But what about the rest of us?  There is little in this year’s bill which is going to make life more complicated for the average income taxpayer.  Most of us receive our payslips in January with the income tax and USC changes already processed.  The payroll software companies will have done all the hard work, not only for employees but also for Revenue.  As long as you’re not self-employed, there is little enough complexity within the Irish tax system.  A simple tax system may not be ideal in itself.  The justification for tax complexity is the attempt to be fair.  It’s fair that people on low incomes pay tax at lower rates.  Over the years however we have whittled out many of the reliefs and allowances for individuals.  These added complexity to the system, but perhaps made it a little bit fairer.  It used to be deemed fair to help people provide for their own financial security.  But tax relief for life assurance premiums has long since been abolished, mortgage interest relief where still available is a mere shadow of its former self, and pensions tax relief has been curtailed.  A system which is doggedly indifferent to any aspect of the status of the taxpayer other than their gross income limits the capacity of government to create relief when it might be needed – for tenants, for parents, for home owners. Of course it is possible to go overboard with relieving measures.  The British system is the paradigm of this, where it is estimated that in total there are over 1,000 types of tax relief available throughout the UK tax code.  By contrast our self-imposed constraint means that the Finance Bill is usually little more than a device to promote the continued enforcement of tax compliance.  Insofar as this year’s bill introduces changes, it adds only to the obligations and little to the benefit of taxpayers.  The University of Paderborn study measures complexity rather than fairness.  That’s reasonable as in any event fairness is probably too subjective a concept to measure objectively.  But it is possible to measure the items in a piece of law which might promote fairness.  In Finance Bill 2018, there are precious few of these. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Oct 22, 2018
Tax

Sunday Business Post, 14 October 2018 It looks like the machine used to make Budget 2018 was pressed into service again for Budget 2019 this week.  Did a machine ever run so quietly? Budget 2018 tinkered with the 20% tax band and the USC rates.  So did Budget 2019.  Budget 2018 had one big idea to raise revenue – an increase on stamp duty on sales of commercial property.  This year the big idea was the reinstatement of the 13.5% VAT rate on the hospitality sector.  Last year's budget had one major device aimed at companies which was to limit tax relief on the income the company derives from intellectual property.  This year the anti-avoidance measure was an exit tax on some of the assets of companies leaving Ireland.  This year however the budget manufacturing machine was using different raw materials.  This budget had to accommodate the concerns of two sets of negotiations; one set to keep the current government in power, and the other set being about the future post Brexit deal with the UK. Confidence and supply permeates Budget 2019.  As in previous years, Paschal Donohoe stuck strictly to the terms of the confidence and supply agreement between his party and Fianna Fáil.  The Fianna Fáil priority of USC reduction was accommodated, alongside the Fine Gael priority of widening the 20% band.  There were no alarms and no surprises.  While Budget 2018 marked the second staging point in the agreement keeping the current government in place, Budget 2019 marked its completion with an option to renew. But what of Brexit?  In October 2017, Brexit was still 18 months away and the initial negotiations between the UK and the EU were lumbering towards a fudged conclusion on a backstop arrangement, designed to ensure there would be no hard border in the island of Ireland.  Now Brexit is less than six months away, and there has been little apparent progress towards concluding a deal on the future relationship between the UK and the EU.  In short, there was not enough in this budget to accommodate the disruption to trade and tax revenues which could ensue from a hard Brexit on 29 March next.  If a hard Brexit transpires during 2019 (and this I think remains a real possibility), a supplementary budget will be required to allow for the sudden changes to VAT and customs yields, and possibly to provide immediate support to the industries suffering the most disruption.  Agriculture and transport will be at the top of that list.  Although the Tanaiste has already seemed to rule a supplementary Brexit budget out we had to do something similar before.  The 2011 Jobs Initiative was to support our hospitality sector which was in crisis following the great recession by introducing a reduced rate of VAT.  There is an irony there, given that the same emergency support was revoked last Tuesday.     The justification for only presenting modest Brexit measures in Budget 2019 may be the protection of a negotiating hand.  It is striking how none of the remaining EU27 countries have broken ranks in any significant way on the EU negotiation stance towards the UK.  Signalling any particular expectation of the outcome was never going to be an option for Ireland.  That’s even if we weren’t under the constraints of the Eurozone budgeting process which goes so far as to determine the day the budget must be presented. This reticence may also partly explain the timing of the establishment of a rainy day fund.  It seems that this idea is subject to rolling rebranding.  One week the rainy day fund is for corporation tax receipt shocks, the next week it’s a Brexit buffer.  Either way it is worth bearing in mind that the rainy day fund itself was a component in the confidence and supply agreement.  Another box in negotiations is ticked. All this however is deeply frustrating for business which has spearheaded the recovery and hoped for some additional support from this budget.  The only measure introduced which affects all employers is an increase in the employer PRSI rate to 10.95%.  It is correct of course to prioritise housing and social welfare issues, but business will feel rightly aggrieved.  Having weathered the worst of the financial storm and provided the bulk of the jobs recovery (some 2 million people are employed by companies in this country) there was little or nothing in the Minister’s offering for indigenous business; the hospitality sector would maintain it is even worse than that.  Even the earned income tax credit for the self-employed, though increased, is not on a par with the PAYE tax credit. Next Thursday sees the publication of the Finance Bill, the detailed legislation which often addresses issues which didn't feature in the Minister's budget speech.  There were some issues flagged, such as changes to the current but largely unsuccessful KEEP system for providing tax relief on grants of shares to employees.  The Enterprise and Investment Incentive scheme, initially designed to fill a gap in the funding market for SMEs, is also up for review because quite frankly it doesn't work anymore for too many businesses. There is no glamour in a slow recovery, with the current state of government stability negotiations, and Brexit negotiations in play.  I don't recall a budget which received such a muted response.  Politically at least, the greatest achievement of the 2019 Budget machine is noise reduction.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Oct 15, 2018
Thought leadership

Sunday Business Post, 7 October 2018 Reading the Script A national budget’s primary objective is to ensure that the money which the government proposes to spend on public services and governance can be met by the taxes raised and other sources of funds.  Masking this humdrum reality is that the budget is one of the few government exercises which affects each and every single person in the country.  As a consequence of next Tuesday's Budget statement, some of us will be a little better off and some of us a little worse off in 2019.  That’s why we tend to evaluate the success or otherwise of the Budget in terms of how it directly affects us – it’s a profoundly political exercise.  Nevertheless, the key measure of success is whether the budget meets its primary objective and this economic measure is almost always at odds with the politics. The Minister will stand up at 1:00pm on Tuesday to set out his 2019 plans, bolstered by the knowledge that his plans made last year will more or less meet the tax-and-spend objectives for 2018.  The exchequer returns for October suggest that the economy is reasonably healthy if not particularly robust.  The main tax raising measure in last year's Budget, the introduction of a 6% rate of stamp duty on commercial property transactions, doesn't appear to be bringing in all it was intended to collect.  Aside from that, tax revenue is more or less at expected levels.  The 2018 Budget followed scripts set out in the Programme for Partnership Government and the confidence and supply arrangement between Fine Gael and Fianna Fail.  What are those scripts telling us about what may happen on Tuesday? Confidence and supply The confidence and supply agreement specifies that there are to be reductions in the universal social charge with an emphasis on low and middle income earners.  This has been an ongoing process in recent budgets.  There is also reference to retaining mortgage interest relief beyond 2017, and tax relief for people with loans taken out between 2004 and 2012 is being continued to 2020 on a tapering basis.  As interest rates are still unusually stable it's unlikely mortgage interest relief will be further extended beyond 2020.  A commitment to introduce an earned income credit mainly targeted at the self-employed which would equate to the PAYE allowance has only been partly fulfilled.  The earned income tax credit currently stands at €1,150.  Parity with the PAYE allowance requires it to be increased to €1,650.  We persist in taxing people not on what they earn, but on how they earn it.  The PRSI treatment of the self-employed is to be revised and “a supportive tax regime for entrepreneurs and the self-employed” is to be promoted.   The merger of PRSI and USC has been on the agenda for some time, though it is unclear how changes in the collection system will be married to changes in entitlements – after all PRSI is a form of insurance and unlike USC not merely a tax.  PRSI reform in recent times has involved small tapering of the rate at the entry point to the system, and modest additional benefits being provided to the self-employed.  We know that employers PRSI, currently at 10.85% will be increased to 10.95% for 2019. There is also reference to Ireland's 12.5% corporation tax rate and “constructive engagement” with measures to work towards international tax reform.   A corporation tax “roadmap” was published last month setting out a timetable for implementing various cross-border company tax initiatives proposed by the OECD and the EU.  We can be fairly certain that there will be progress on these, particularly on the new so-called CFC rules which ensure that companies established abroad will have to prove their bona fides or be taxed as if their activity and profits had never been moved offshore. The Programme for Partnership Government As you might expect, many of the items in the Confidence and Supply agreement are articulated in the Programme for Partnership Government.  After all the two arrangements have to coexist.  On broader tax issues, the programme refers to capital acquisitions tax with an emphasis on reducing the tax burden on gifts and inheritances from parents to their children.  At the moment the first €310,000 of such gifts is exempt, and the programme envisages raising that threshold to €500,000.  A commitment to reducing childcare costs and caring costs generally was addressed in a small way last year when the home carer tax credit was increased from €1,100 to €1,200.  More ominously however, there is mention of the removal of the PAYE tax credit for higher earners and that potential policy shift received attention in the interdepartmental Tax Strategy Group papers published earlier in the year.  These papers tend to highlight what is actively under consideration, and ideas to target higher earners have been given additional political oxygen by the Comptroller and Auditor General’s report for 2017 which drew attention to low effective rates of tax on wealthy individuals.  The other big revenue raising idea in the programme is not to index tax credits by reference to inflation.  This ensures that the government takes a proportionately higher bite out of peoples’ after-tax income each year, and the idea has been rigorously followed in previous budgets.  It's a big part of the reason why the feel-good factor which should be associated with better economic times is not filtering through.  Even though the economy is recovering, the failure to index the various tax allowances means that we pay proportionately more tax as a consequence.  That's not a trivial issue.  The Parliamentary Budget Office report published on 1 October cites the benefit to the Exchequer as being more than €600 million per annum.  That means that a typical employee is paying some €300 or more in tax each year than would otherwise be expected. The Programme for Partnership Government also addresses business issues, but with a faint air of missing the point.  Remember the programme was devised before Brexit.  The vague aspirations it contains to provide a supportive tax regime for entrepreneurs and the self-employed requires a sharper focus in these post Brexit referendum times.  In particular it talks about the retention of the 9% VAT rate on tourism-related services but with the important caveat that prices remain competitive.  That proviso would give the Minister the political leeway to increase the 9% VAT rate possibly back to 13.5%, or by a few percentage points less, say, to 11%. Plans to use the taxation system to encourage greater land mobility to boost farming incomes is an area where there has been considerable progress over the last several years.  Existing tax breaks for family farm transfers have been retained or extended. Putting it all together These scripts provide plenty of hints about the shape of Budget 2019.  There are even further clues in the various public consultations and ministerial speeches in recent months, and the review of the corporation tax regime carried out by the Public Accounts Committee will not be ignored.  I think the likelihood is that there will be modest adjustments to USC rates and entry points, and an increase to the threshold of €34,550 where single taxpayers leave the 20% tax rate band and start being taxed at 40%.  There isn’t enough money in the kitty even for these modest adjustments, so there will be revenue raising measures.  Look out for hikes to the price of petrol, diesel and fuel generally under the badge of a carbon tax.  A change to the 9% VAT rate cannot be ruled out.  An announcement regarding Local Property Tax reform may be deferred; the revaluation of properties with the corresponding tax consequences is after all next year’s problem. There could be new anti-avoidance measures announced for income and corporate taxpayers alike, with a particular focus on high earning individuals.  We need to see some safeguarding measures against the consequences of Brexit.  Remember 29 March 2019, the official Brexit date, falls during the Budget year, but given the state of flux in the negotiations, these might be muted. This will be a Budget which will leave most people slightly better off.  It will not lose sight of first purpose however, which is to meet the economic requirements.  Tuesday will be interesting, but not an opportunity for a party. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Oct 08, 2018