Tax

Sunday Business Post, 10 June 2018 A considerable distance away from the cachet of a stock exchange listing and from the drama of an initial public offering, small companies use less glamorous tactics to raise money. Companies most commonly raise money by bank borrowings, and small start up businesses always found that difficult.  The bank travails of the last decade made it even harder for businesses to borrow, so much so that the government felt obliged to set up a separate agency, the Credit Review Office, to deal with refusals to some commercial borrowing applications.  In such a market, you’d expect that more companies would try to use the other traditional way of raising money by issuing shares, in effect, borrowing from their shareholders.  Investing in shares in a quoted company is one thing as there is a ready market for redeeming that shareholding.  But taking a punt in a privately quoted company is very different. A Short Ego Trip The late business guru Mark H. McCormack once observed that buying a minority shareholding in a private company is little more than a short ego trip for the investor.  The investment itself is high risk.  The return on the investment by way of dividend is often tiny.  And then there is the problem of how to redeem the investment, always assuming that adverse trading conditions or poor management haven't whittled it away to nothing.  Something to sweeten the deal is needed, otherwise the funding problem for small businesses will persist.  Hence the existence of the Employment and Investment Incentive Scheme (EIIS) and its first cousin, the Start Up Relief for Entrepreneurs (SURE). EIIS works by bending one of the fundamental rules of taxation.  It blurs the distinction that is made between day-to-day business expenses which can be allowed to reduce taxable income, and the amounts spent on investing in capital (real estate, shares and the like) which don’t reduce taxable income.  In a nutshell it gives an investor an income tax break for the capital value they invest in the small start-up company.  The Exchequer shares in the risk the investor is taking by putting money into a privately held company.  Because the Revenue Commissioners don't like risks much, there are lots of terms and conditions attaching to EIIS and SURE.  Chief among these are that the company must be a relative newcomer, relatively small, and the amounts that are invested should be relatively low.  The impact of these restrictions can be seen from the headline figures associated with the EIIS.  There are well over 150,000 companies incorporated in Ireland but in 2016, only 261 companies raised funds by using the relief.   The total amount of all the investments was just over €100 million, and typically individual investors invested about €50,000.  The tax cost to the Exchequer in 2016 was estimated at just over €32 million. Small but Reviewed In the overall scheme of things, these are relatively small figures.  You'd expect them to be higher, given the difficulties that companies have in raising funds, and the attractiveness of the EIIS relief on offer for individuals.  In recent times over €7 billion has been collected in corporation tax each year and over €18 billion in income tax.  Against that backdrop, this particular tax incentive costs very little indeed, yet it is under official review at present. All tax reliefs should be reviewed periodically.  If the property tax reliefs of the 80s and 90s taught us anything, it is that tax reliefs should not continue indefinitely otherwise they create distortions in the markets they were supposed to correct.  In the 1980s property tax reliefs were brought in for good reasons to address a shortage of decent moderate cost rented residential accommodation.  However when left unchecked, 20 years later, they contributed to the property bubble.  We can see from the amounts involved that the EIIS is not contributing to any kind of bubble.  So why is it under review? The State Aid Thing The answer may lie in EU's rules on state aid.  The EU state aid rules don't allow the government to provide selective benefits to particular companies or sectors.  Raising money using tax incentives is potentially an illegal state aid, so permission has to be sought from Brussels for schemes like EIIS to operate.  A problem has arisen in that the European rules no longer allow small companies which are in existence for more than 7 years to raise money within a tax incentive scheme.  Many companies which would otherwise qualify comfortably under the EIIS framework have been stymied by this requirement. The reason for this European policy is unclear.  Policymakers are sometimes concerned about what they term “deadweight” – incentives of all types to promote activity which would occur anyway even without their existence.  Whatever the motivation, it has severely restricted the commercial usefulness of EIIS for companies in an expansion phase. So the review currently underway is possibly not so much about individual tax savings, nor even about the amount the exchequer is foregoing on EIIS relief.  Perhaps the question is instead a political one.  We know from the Apple case just how difficult the EU state aid issue is for the government.  How far is Ireland is willing to push the boundaries of the EU state aid rules to provide a tax benefit for funding smaller indigenous industry?  The answer is unlikely to be glamorous. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Jun 11, 2018
Tax

Sunday Business Post, 3 June 2018 According to some news headlines this week, Italy is in chaos because of its political impasse.  Elections held there over two months ago have yet to result in a government being formed.  There may well be political chaos, but I spent some time in Italy last month.  Day to day life didn't seem to me to be any more chaotic than usual.   Politicians and those who comment on them are capable of over estimating their impact on the people and institutions which they govern.  Our own country didn't fall over back in 2016 for want of a government for several months after the inconclusive election results. In Europe it is becoming increasingly commonplace for countries to cheerfully survive months without an established government.  Realpolitik However, where there is political indecision or instability, institutions can come up with politically deaf notions.  A report by a Dublin City University professor some weeks ago suggested that UK MEPs would not have to leave the European Parliament post Brexit, because they were, in some sense, still representative of the European population as a whole.  That finding was met with some suspicion by the political system.  Our man in DCU may well have been right in his reading of the way European law works.  Pragmatically though, there will be no room for politicians from the UK in the European Parliament after 29 March 2019.  Their influence is already in decline.  Similarly, the European debates on tax, notably the Common Consolidated Corporate Tax Base proposals, miss the realpolitik of the foisting of Europe wide rules on national governments.  Brian Hayes MEP has been especially strong on this point to any European officials or Commission members who will listen to him.  No finance minister can come back to their national governments to explain that their country is going to lose €1 billion or more in tax collected  because of change to a new EU system,  When there are some political holes that simply cannot be filled, democratic controls curtail the poorer policy ideas that governmental institutions can bring to the fore.  Any policy reform must be both politically and technically feasible.  There is a much quoted observation, apocryphally ascribed to the late Dr Garret FitzGerald, that some proposals may be all very well in practice but also have to work in theory.  Usually the risks are all the greater should theoretical desirability trump the practical application of a new policy.  Where is the Private Sector? Take for example the setting up of the Interdepartmental Pensions Reform & Taxation Group as reported by Michael Brennan in this newspaper last week.  It is made up of officials from a range of government departments.  There are no private sector representatives among its membership.  Shouldn't there be someone with life experience of private sector pension funding contributing to any such think tank?   Remember what happened the last time policy makers turned their attention to private sector pension funds.  A levy of 0.6% of the capital value of private sector pension funds – note private sector only – was applied to unsuspecting pensions savers.  That levy was unjust.  It was a wealth tax levied on one cohort of our society simply because it was possible, not because it was right.  In normal circumstances the political system might have headed this injustice off at the pass.  Tax policies from 2011 were not created in normal times and the levy has since been abolished.  In recent years pensions “reform” has involved proposals to remove tax reliefs for pensions savers without any underlying systemic reform, which is an odd approach for a nation where 65% of private sector workers have made no provision of their own for retirement.  The government’s latest “pensions” roadmap says this is “despite the availability of generous pensions reliefs”, without apparently considering that maybe 35% of private sector workers can afford to make contributions to schemes only because of the availability of said “generous” pensions relief.   A lack of generosity Nor is there anything particularly “generous” about a relief that reduces future demand for state services while collecting tax on future pensions payments.  Pensions tax relief is only generous when it is compared to the other few tax reliefs available to workers.  Pensions tax relief only seems generous if you don’t have to rely on it for a secure retirement because you have a state funded pension.  Promises to introduce mandatory private sector pension funding, with an option to opt out, have been made for decades.  According to the government pensions roadmap, mandatory pensions funding in the private sector might not be a reality until 2022 at the earliest.  This is a bizarre delay for a strategy which is favoured by trade unionists and employers alike.  The current government could well be heading into its last few months.  The confidence and supply arrangement keeping the Taoiseach and Cabinet in place only extends to the next budget.  In such a climate ideas emerging from the likes of the Interdepartmental Pensions Reform & Taxation Group might not receive the kind of political scrutiny they should.  We need our political system to knock poor ideas from our governmental institutions on the head.  Pensions policy has a poor track record. Tax relief for private sector pension funding is one of the last tax reliefs available to individuals which carries a social benefit.  If it is to be curtailed or eliminated, we need our politicians to be asking who benefits from increasing the tax burden on the private sector.   Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland    

Jun 05, 2018
Tax

Sunday Business Post, 27 May 2018 One of the immediate effects of GDPR, the General Data Protection Regulation which took effect in Europe last week, is to remind us of just how many online subscriptions we have.  We sign up to newsletters, merchant sites, publishers and God knows who else with a whimsical indifference to the knowledge and data we are surrendering to them.  We leave our electronic fingerprints behind us all the time.  The advent of GDPR has resulted in responsible companies from all over Europe getting in touch with those of us whose email addresses they retain on file.  They remind us of their existence while invariably assuring us that their record of our existence is safe with them.  Companies cannot take the reputational risk of failing to be good data custodians.  Exempt from these new regulations are state agencies of all descriptions, including the Office of the Revenue Commissioners.  We probably don't need to be reminded of Revenue’s existence and they certainly never seem to forget about ours.  Opting out is not an option with Revenue.  But in addition to dealing with your tax affairs you can opt in to receiving Revenue briefings, reminders and bulletins which issue practically on a daily basis.  Revenue Paranoia One such bulletin in particular caught my eye this week.  Revenue tell us they are looking to hire external experts to help them police Research and Development (R&D) tax relief claims.  Revenue's paranoia about sharing anything remotely resembling taxpayer information outside the organisation is well-documented, but there are times when they have to have recourse to external, private sector expertise.  Dealing with R&D tax credit claims is one such occasion.  Someone has to decide when high-tech development starts and stops, and indeed whether the development is sufficiently high-tech in its own right to warrant the tax relief claim.  Hence the Revenue need for outside specialists; scientists educated to doctoral level who can assess not in tax terms but rather in scientific terms what is actually going on in a company and whether some of it might be eligible for the tax break. The R&D tax credit is one of the few survivors of the purge of tax breaks which was completed in 2011.  It's available primarily to companies.  R&D relief is of course of most benefit to businesses which are engaged in high-tech manufacturing.  Almost by definition, it is not available to more routine wholesale or retail industries.  The R&D credit rewards expenditure on the people, equipment and buildings required to develop know-how, patents and other forms of intellectual property – the new foundations of economic well-being, in much the same way as abundant natural resources were the foundations in the past.  Unique The R&D credit is unique for several reasons.  Not only did it survive the purge of tax reliefs but in actual fact it was extended.  More company investment qualifies now for the relief than had been the case in the past.  Secondly it is unique in that it is a benefit which can spill over to the employees of the company and reduce their personal tax bills, subject of course to terms and conditions.  And it is uniquely generous.  Every €4 of the spend that qualifies further reduces the company tax bill by €1. These factors have made R&D claims very popular, and have resulted in significant tax reductions for the companies availing of the break.  Recent official figures suggest that some 1,500 companies have made successful claims each year for the past three years, at an Exchequer cost in excess of half a billion euros annually.  Tax largesse of that magnitude is hard to come by.  When a tax relief is this effective, you begin to fear for its safety.  Despite the many tax regime change for companies made over the last decade, the Irish system is still perceived to have a whiff of cordite.  The elimination of stateless companies, the phasing out of the “Double Irish” tax deferral structures and the creation of one of the tightest tax reporting and regulatory regimes in the world have not rebuilt the country’s reputation as they should have.  That’s mainly because most of the criticism comes from our competitors, with some of the Europeans still calling us tax pirates.  Our politicians and officials shouldn’t be too thin skinned as pressure continues for further levelling of our allegedly skewed tax system. Past Concessions R&D relief in some shape or form is available in most developed economies.  By and large R&D tax breaks don't contravene the EU state aid rules.  The EU's own alternative tax corporation proposals, the so-called Common Consolidated Corporate Tax Base, has provision within it for R&D relief.  R&D tax credits scarcely received mention in last year’s Coffey Review of Corporation Tax except to note the scheme’s effectiveness in promoting the growth of research activity.  These factors should ensure its future.  But in Ireland, R&D tax relief is also the gateway to accessing the Knowledge Development Box tax relief, where eligible income streams get taxed at 6.25% rather than at the mainstream 12.5% tax rate.  Past concessions in Ireland’s corporation tax regime have been largely ineffective in dampening international criticism.  By now there is little more left to concede.  There should be no more sacrifices made to secure the continued acceptance of the 12.5% regime which is about jobs as well as about tax yield.  The corporate sector was responsible for 1.9m jobs in 2016.  The recurring message from our industrial development agencies is the importance of growing our own multinationals, and the capacity for promoting research and development is critical to that.  Businesses across Ireland are currently doing what’s necessary to ensure our reputation for data integrity under General Data Protection Regulations.  You’d have thought we had already done enough on the tax front. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

May 28, 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