Thought leadership

Sunday Business Post, 30 September 2018  One of the dilemmas facing future historians will be to pin-point exactly when the Brexit negotiations between the EU and the UK went off the rails.  Was it when David Davis, the UK negotiator, lost his arguments about the sequence of discussions in 2017, before discussions had even really got underway?  Or was it in the November 2017 fudge, when all the parties declared that sufficient progress was being made on the Northern Ireland border to permit broadening the scope of talks to encompass the future trading relationship?  Or was it earlier this month in Salzburg which showed in bleak terms the chasm between the expectations of the technocrats and the political realities? I’m in Central London, where all around me the newsstands are leading with a story about Next.  Next, the clothing chain, is developing contingency plans to improve their fulfilment capability outside the UK by establishing a company in Dublin that will manage its cross border customs issues inside the European Union if there is a hard Brexit.  Salzburg has changed the narrative.  Business is waking up to the realities of Brexit, deal or no deal and that Next jacket or pair of jeans leaving the UK for an EU destination could well face tariffs and delays as it is being delivered to an EU customer from a UK port.  Other UK newspapers are carrying the results of a survey of supply chain managers by the UK Chartered Institute of Procurement and Supply.  This claims that 10% of firms believe their businesses would likely go bankrupt if goods were delayed at the border by between 10 to 30 minutes.  While it’s not clear if it would be correct to apply that 10% figure across all businesses, the survey highlights the biggest practical problem with a hard Brexit.  That is the delays at entry points to goods being shipped from the UK to the rest of the EU, and vice versa.  Tariffs particularly tariffs on agricultural goods matter.  But all goods will fall subject to checking and hence delays.  It’s harder to get paid for delayed or perished goods, and cashflow problems kill businesses faster than anything else. Technology and trusted trader schemes for customs checking aren’t solutions either.  There’s no point in having a container pre-cleared and electronically tagged for customs purposes if the HGV carrying it is stuck in a queue behind 100 HGVs with containers which have not been pre-cleared.  The delay is still the same.  Nor will technology resolve the regulatory requirements enforceable by EU member countries on UK businesses post Brexit.  The UK is replacing one set of international trade regulations for its manufacturers with up to 27.  As one UK manufacturing executive put it to me, her business is still working out the number of new labels they will have to design and apply to their consumer products.  This is to meet the individual country requirements currently imposed on countries outside the EU.  If the labelling is wrong, the product is worthless.  It’s difficult and costly to peel labels off several thousand bottles of product.  If the politicians and negotiators at the heart of the Brexit process are becoming angry and frustrated, so too is business because of the ever increasing risk of hard, no deal, profitless Brexit.  The Brexit political debate is more centred around issues of migration and political sovereignty than about trade and commerce.  Given that the EU project started life as the facilitation of commerce to deflect causes of conflict, this is quite an extraordinary turn of events.  But the official attitude among the negotiators seems to be that businesses will somehow find solutions and be able to cope.  The fact is, many won’t. So what’s to be done?  The EU institutions should perhaps remember that they have already secured their main objective; that no other member country might wish to leave.  Brexit has become an object lesson in how not to do things, and all lessons have some value.  Outside of the UK, being an EU leaver is a minority sport and will remain so.  It is hard for any trade deal to beat membership of a customs union.  The EU can afford to be a bit more civil towards the UK, and that starts with its most senior official, Donald Tusk, refraining from recourse to Instagram with photos of cherry-free cakes.  The second part of the remedy is more difficult.  The UK has to recognise the serious commercial and social issues Brexit creates, and either revoke it or accept a semi-detached accommodation with access to the single market as Norway has done. Neither graciousness nor admission of mistakes are natural attributes of the political classes, particularly in this populist era.  Nevertheless these need to be injected into the process and in double quick time.  Without them, there will be a hard Brexit.  With a hard Brexit, the living standards of people in both the UK and in the remaining member countries (particularly Ireland) will fall, because commerce will flag and falter.  Faltering commerce will lead to hostilities – look what’s happening between the US and China at the moment with a nascent trade war.  For Brexit, a successful outcome looks a lot like the way the EU was before 29 March 2017, the day the UK formally notified its intention to leave the EU.  Maybe future historians will nominate that day as the day when the Brexit negotiations between the EU and the UK went off the rails.   Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Oct 01, 2018
Tax

Sunday Business Post, 30 July 2017 How much can we reasonably expect to gain from next year’s budget? We won’t really know the answer to that until the middle of October. But figures published this week by the Revenue Commissioners contain strong hints as to what might be possible. And that is very little. “Ready Reckoner” is an innocuous enough title for a document that shows the tax landscape as Revenue see it. It’s a unique profile of the Irish citizen analysed not by where they live, nor by their status nor by their attainments or qualifications. This profile is all about the capacity of people to pay tax, and what the exchequer implications might be if they were asked to pay a little bit less or a little bit more. How many taxpayers? The single biggest achievement of the economic recovery has been the reduction in the number of unemployed people. While we still have some distance to go, the number of income earners in this country now tops 2.6 million. “Income earners” has a particular meaning of its own – for instance a married couple with two people earning are categorised as a single income earner. This particular report is blind to the usual niceties.  A significant number of income earners pay no taxes mainly because they are not earning enough to be caught in the tax net.  770,000 of us fall into this category. That still leaves almost 2 million taxpayers amongst whom the largesse of Budget 2018 must be spread. We know from the Summer Economic Statement that fiscal space for tax cuts is in short supply. If the money available for tax relief was to be spread evenly across the taxpaying population, we would all be better off to the tune of about two euros a week. That’s hardly a lifestyle changing benefit.  The recurring problem for any Minister for Finance is that any tax relief made generally available costs a fortune to implement. To make any meaningful change to the fundamentals of the tax system – say for example a 1% percentage point reduction in the 20% rate to 19% – €500 million must be set aside. That kind of sum is simply not available without raising taxes elsewhere and the ready reckoner contains plenty of ideas to do that.  Shaking the tree Take VAT for example. We seem to have a remarkable tolerance for VAT increases in comparison with income tax or local property tax increases. The 21% rate of VAT went to 23% in 2012 with barely a murmur. Over half of the goods and services bought by consumers attract VAT at the 23% rate. A one percentage point increase in the VAT rate to 24% would bring in €411 million. At that level you’re touching the edge of what the EU will allow, as the EU directives don’t permit the rate to go beyond 25%.  Excise duty would be another happy hunting ground for the Minister for Finance. By adding 10 cent to the price of a litre of diesel, the exchequer would benefit to the tune of €250 million. An extra 10 cent on a litre of petrol drags another €100 million euros into the government coffers. VAT and excise increases are especially attractive to government because they bring in additional money with almost immediate effect and are almost impossible for taxpayers to circumvent or avoid, legally at any rate.  Income tax, VAT and excise measures are undoubtedly the big-ticket items when it comes to tax collection.  For income tax in particular, the Ready Reckoner highlights another aspect of tax collection, frequently overlooked. If tax allowances and bands do not increase with inflation, the net result is a greater share of taxes flowing into the exchequer.  Even though inflation is historically low, by not indexing up items like the personal tax credit which currently stands at €1,650, the government stands to gain an extra €300 million. While this is a tax technique that goes largely unnoticed, it contributes to the individual’s sense of being within the squeezed middle and not feeling the benefits of economic recovery. Value for Money What the Revenue’s ready reckoner does not and cannot address is the extent to which the taxes identified represent good value for the taxpayer. We tend to look at taxes and tax collection in isolation without reference to the levels of government service and benefits provided. That makes it impossible for example to meaningfully compare different tax systems. It’s all very well to point to higher standards of public service in other countries – the Scandinavian countries are frequently cited – but at what cost to the taxpayer?  Where there are limited resources for tax cuts the focus must be on the equitable treatment of taxpayers. We are already good at progressivity – ensuring that people on lower wages pay proportionately less than those on higher incomes. We are not so good at ensuring that people in similar situations are taxed similarly. There are big discrepancies caused mostly by the jump from the 20% income tax rate to the 40% tax rate between people earning just below the average wage of around €37,000 per annum and people earning just above it. And the self-employed person on identical earnings to the salaried counterpart will pay €700 more in income tax.  Making some progress in the next Budget towards rectifying those anomalies is possible, even with limited resources. Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland.    

Jul 31, 2017
Tax

Sunday Business Post, 23 July 2017 The Government's track record on critical areas of environmental management, how we treat water and how we treat waste, has been abysmal.  In regard to waste collection and a universal pay by weight system, that particular can was quite literally kicked down the road.  The shambolic efforts to establish a water authority with adequate resources to deal with the crumbling infrastructure defy description.  Not only has a water charges regime failed, we are to be allowed retain the €100 water conservation grant.  It would apparently be administratively too difficult to recover – “extremely difficult both legally and logistically” as the Taoiseach was quoted as saying earlier this week. If this is the way we deal with environmental problems we can see, touch, taste and smell, how are we to deal with environmental problems that we can’t?  Falling into this invisible category are carbon emissions.  The need to control the amount of carbon reintroduced into the atmosphere primarily by burning fossil fuels is tackled by yet another government plan published this week – the National Mitigation Plan.  On foot of recent experience with water and waste, even those of us who are not climate change sceptics are disposed to be sceptical about this new “living document” as it has been described.  Weighing in at over 60,000 words this particular living document will require a lot of sustenance to keep it going.  Carbon Emissions The management of carbon emissions is a serious topic, not least because we subscribe to international agreements which can involve financial sanctions for countries which don't do enough to meet carbon emission reduction targets.  The National Mitigation Plan observes that there will need to be a “targeted balance” (whatever that means) between Exchequer-supported expenditure and fiscal, taxation policies and regulation.  It then goes on to observe that in certain cases, “taxation policy may have a stronger role to play in changing individual or business behaviour”.  There is no doubt that taxation policy can have a huge influence on both business and consumer behaviour.  The paradigm is the environmental levy or the plastic bags tax as it is far better known.  This levy has decimated the use of plastic bags in this country.  It is striking when travelling abroad just how prevalent the use of plastic bags continues to be in countries which did not take similar steps to reduce their potential for pollution.   Ireland doesn’t only use a plastic bags tax to help improve the environment.  There are other levies already in place towards managing carbon emissions.  In this country, we have a system of carbon taxes on fuels, calculated at the rate of €20 per tonne of CO2 emitted from their combustion.  This results in a levy of about 5.6 cent on a litre of petrol, and 6.5 cent per litre of diesel.  Almost every motorist knows that a big chunk (around 60%) of the price of fuel at the pumps goes directly to the government in various forms of VAT and excise.  Nevertheless in a straw poll around my office which has its fair share of financially savvy people, hardly anyone was aware of the carbon tax component. Changing Behaviour This begs two questions.  First of all, is a 5 or 6 cent per litre levy sufficiently hefty to change consumer behaviour?  I suppose that's down to the individual.  It does strike me that the differential between the carbon tax on petrol and the carbon tax on diesel is not sufficient to make the average motorist prefer one fuel over the other.  But more importantly, how can any tax or levy change behaviour if people are unaware of it? Behavioural economics theory suggests that a big part of the reason the plastic bags tax is so effective as an agent of behavioural change is because it is so obvious.  A positive answer to “do you want a bag for those” results in an additional 22 cent being rung up at the till.  Shops even promote tax avoidance strategies by offering more robust shopping bags for sale or cardboard boxes for packing groceries.  Carbon taxes do not have anything like this prominence. On the other hand a carbon tax break which is well publicised might be far more effective.  The lower the rated emissions from the car, the lower the annual motor tax.  The Mitigation Report identifies this as a success with some justification – apparently three quarters of all vehicles sold fall into the lowest emissions bands.  Lower annual motor tax is an obvious advantage which a dealer will always point out on the forecourt when selling a car.    If effective measures to counter the volume of carbon emissions are to be taken via tax policy, any new charges involved have to be both clear and high-profile.  On recent evidence the instinct of the current administration is to shy away from any type of clear or high-profile charges on the population.  Charges of that type have already caused the demise of our water and delay of our waste policies.  This is the dilemma for this Mitigation Report.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jul 24, 2017