Thought leadership articles

Brian Keegan, Director of Public Policy & Tax, weekly column in the Sunday Business Post

Tax

Sunday Business Post, 16 September 2018 Exactly four years ago, I started writing about tax for the Sunday Business Post.  Four years and some 200 articles on, I had planned that today’s piece could mark the anniversary, an occasion to write about the best innovations in tax practice and policy that have materialised over in the four-year period.  But I quickly realised that would be very hard to write eight hundred words about tax improvements in recent times. It’s so much easier to write about the bad ideas.  Over the last four years, we have seen a proliferation of innovative ideas to part citizens and companies from their money via varying degrees of coercion from the tax system.  The EU has continued its drive towards a harmonised tax system across the continent for companies.  There is still talk of a financial transactions tax, putting a new levy on some financial instruments (which Ireland opposes mainly because we already do it).  Serious people are giving active consideration to a form of excise duty on sales by the larger e-commerce multinationals.  Perhaps the most remarkable thing is how few of these cunning plans have come to pass.  Where there has been change, it’s had to do with cross border cooperation and more compliance obligations for taxpayers, rather than changes to the underlying methods of tax calculation and collection.  This suggests a remarkable resilience, not so much in the tax system but rather in the political system.  Democratically elected politicians tend to be keenly aware of what might wash with the electorate, and what will be utterly rejected.  That awareness leads to greater tax complexity, sometimes generated by absurd political ideas about how to impose taxation while giving the least possible offence. The current paradigm of inoffensive taxation are the Brexit manoeuvres put forward in the Chequers document, which seek to create a protectionist environment for the UK without imposing the protectionist tax controls of customs and VAT on former EU trading partners.  Little wonder the Europeans are having difficulty with that idea.  The Chequers framework is part of a political process and will have to be treated as a stepping stone rather than as a final destination. Closer to home, the Local Property Tax manoeuvres reported last week by Michael Brennan of this paper seem like inoffensive taxation.  LPT will increase next year because properties must be revalued next year.  Apparently there is an option being considered to mitigate the impact of increasing property values by allowing different local authorities to apply a different rate of LPT.  The notion is that in areas where property prices have substantially increased (for example in Dublin and Cork city), the rate of LPT charged will be lower than that charged in areas which have not seen such an uplift in property prices since 2013.  This is such a bad idea on so many levels that is hard to know where to start. Under this new schema, it seems that the more disadvantaged a county is, the higher the rate of LPT.  How can that be just or equitable?  Also the idea embeds in the tax system the notion that property values will always be on the increase.  Skewed rates might fix a problem in a rising market, but how unfair will it be to have such a multi-tier regime when property prices start to collapse?  While the bulk of LPT is paid by individuals, a proportion is also paid by corporate landlords.  Applying different tax rates to companies by reference to where they operate sails dangerously close to contravening EU State Aid rules.  If the idea is to work at all, there might have to be a separate LPT regime for companies to equalise the rate they pay irrespective of the property location.  LPT is complicated enough in its own right already, primarily because the system makes allowances to reflect inability to pay by granting deferrals and recognising disadvantage etc.  A multi-tiered LPT system also raises a more fundamental question.  Do we levy taxes in such a way as to support the circumstances of the economy, or is the primary goal to provide for the citizen?  These two objectives don’t have to be incompatible.  250 years ago the English philosopher Jeremy Bentham could write that that law should be drafted and imposed so as to create the greatest happiness for the greatest number of people.  Reformed and revised LPT as envisaged might contribute to the happiness of citizens, but for how long?  Do poor roads, poor sanitation or poor water supplies justify a few percentage points off the LPT rate?  That already overburdened army officer, General Taxation, can only pay for so much.  LPT has to be reformed.  Any property tax that does not revalue the properties it charges on a regular basis is, I believe, unconstitutional.  However a multi-tiered, multicounty system is surely not the way forward. And finally, if I might.  The fourth anniversary of this column also marks the last occasion for the current editor, Ian Kehoe, to cast his critical eye over it before publication.  He has never changed anything I wanted to write, and for that I thank him.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Sep 17, 2018
Tax RoI

Sunday Business Post, 9 September 2018 This week saw the publication of two major tax policy documents.   The first of these, published by the OECD on Wednesday morning is a review of tax policies in 38 countries.  Its findings are available in eight different languages.   The second, from our own Minister for Finance, is a corporation tax roadmap.  So far it is only available in English.  An Irish version may become available at some stage.  It is this report however that needs publication in eight languages.  Billed as a roadmap to outline future changes to the Irish corporation tax regime, it is also a chronicle of the journey already travelled.  It lists the various international initiatives to nullify cross-border tax planning by multinational corporations, and Ireland's role in quenching those opportunities.  As such it is an exercise in national reputation building; don't just look at what we plan to do, look at what we have already done.   Despite the suggestions in commentaries ranging from pub debates to the New York Times musings of economist Paul Krugman, countries do not sit on their hands when it comes to taxing the multinational companies that operate within their shores.  The challenge is in applying tax accurately and fairly to cross border transactions.  Revenue authorities wrestle with an out of date international tax system, designed in colonial times to ensure that corporate profits could be taxed in the capital of the Empire rather than where the business operated from.  They have been hampered by the ability of organisations to pick and choose from tax systems across borders.  Many modern businesses makes their profits not from harvesting crops or digging materials out of the ground but from harvesting data and scientific digging to create know-how.   So what kind of tax planning is being targeted?  Unlike an individual taxpayer, a company can act as a member of a group of companies under common ownership, or have branches in many different countries.  It can sell its goods to its own subsidiaries or branches in other countries, structuring prices so that the most profit is made in low tax countries and the least profit is made in high tax countries.  This practice is known as transfer pricing.  Transfer pricing has long been a target in the fight against international tax planning.   Another avoidance strategy is known as a hybrid.  As a general rule, if the company makes a payment and is granted a tax deduction in one country, the payment it has made should be taxable in the country in which the payment is received.  Hybrid instruments can create a mismatch in this cross-border treatment, to the detriment of the exchequers of both countries concerned.  Some companies establish trading operations in a foreign country with a more benign tax environment, even though they might have no particular commercial reason for doing so.  Such foreign adventures, known as Controlled Foreign Companies, also feature as a target in the roadmap.   None of these targets were identified out of the blue.  Almost a decade ago the G20 economies, decided that something needed to be done to counter cross-border tax planning.  That political concern led to a report from the OECD which became known as BEPS – a strategy to counter tax Base Erosion and Profit Shifting.  Many of the principles established in BEPS have since been codified into EU law.  A large element of the current Irish roadmap outlines how and when EU law will be transposed into Irish law.  Some of the BEPS initiatives have already resulted in corporate restructuring which in turn has contributed to an increase in corporation tax receipts in this country.  It's too early to say if the continued curbing of multinational tax planning via BEPS will continue to result in significant increases to the tax yield.  That is mainly because the world's largest economy, the US, has been carrying out some tax reforms of its own.  The impact of the 2017 US Tax Cuts and Jobs Act is still being felt.  In some instances regulations continue to be issued from the US Treasury Department to clarify the operation of some of the more labyrinthine provisions of the act.   Although the main achievements in corporation tax terms of the US Tax Cuts and Jobs Act is to bring down the headline corporation tax rate in the states from 35% to 21%, there were also significant anti-evasion and anti-deferral measures.  These bring more profits into the charge to US corporation tax, but the corporation tax well isn’t bottomless.  Other jurisdictions where multinationals have activities are bound to lose out.  Amid all this change, international reputation is more important than ever in attracting foreign investment.  Companies need to know that they are not operating in a regime which can result in confiscatory levels of taxation on cross border transactions, and therefore need the assurance of an environment where all the internationally accepted rules are the norm.  While multinational corporations can choose this degree of comfort, smaller indigenous operations don't have the same choice.   For that reason, indigenous Irish business may well look at the Minister’s roadmap with some alarm.  The current document does not rule out the extension of transfer pricing rules to smaller indigenous industry which is usually disregarded by revenue authorities for reasons of scale.  That mightn't matter so much if it wasn't for the two tier Irish tax system which taxes most corporate profits at 12.5%, but reserves a special 25% rate for passive income such as rental and investment income plus an additional 20% tax reserved for family run companies and professional service companies.  Keeping on the right side of transfer pricing rules where income streams are taxed at different rates and on different types of corporate taxpayers may prove quite a challenge.  Those concerns aside, the corporation tax roadmap by and large constitutes a proportionate response to the obligations placed on this country by virtue of our OECD and EU membership.  But even if the roadmap was available in eight languages, I'm not sure if it would fix the charges of a poor tax reputation which our competitors are so happy to level at us.  Irish corporate tax policy is the dog that has been given a bad name.  It will take more than this roadmap to fix that problem. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Sep 10, 2018
Tax

Sunday Business Post, 2 September 2018 Lots of tax credits and reliefs go unclaimed every year.  Sometimes people don’t know what is available to help reduce their tax bill, or think they don’t qualify, or are reluctant to deal with the red tape with the Revenue.    The tax reliefs for individuals are all there for a social or political reason, perhaps to support education and healthcare, to assist in the care of the elderly, or to help provide a decent standard of living for workers on retirement.  While the Department of Finance calls these tax reliefs “tax expenditures”, they achieve real savings for the Exchequer.  That’s because many tax reliefs encourage taxpaying citizens to spend their own money on services which arguably the State should be providing in any event. When you couple that with the prospect of little or no tax help in next month’s Budget for many workers, you shouldn’t be shy about availing of anything on this list. In recent times, claiming tax back has become a bit more straightforward due to improvements in Revenue’s technology.  You will find, as you read through the tax saving tips, that you can claim for most tax credits or tax reliefs using Revenue’s online myAccount service.  If you’re not registered on it, you should do so.  It provides facilities to claim tax credits and reliefs and submit tax returns.  This service is aimed primarily at PAYE taxpayers.  The self employed, along with some others who are obliged to file an annual return of income, can use ROS (Revenue Online Service). Always remember you can only claim back on taxes for the last four years.  Even though Revenue can go back further to pursue underpayments, tax overpayments beyond that are gone for good. Here is an overview of some of the most common tax reliefs that might be available to you with some guidance on how to claim them, whether you’re employed or self-employed.  None of these claims amount to aggressive tax planning – they are standard reliefs available to income tax payers in the tax code.  The information below is just a guide and cannot cover every detail and eventuality so check out your circumstances with your tax office or tax advisor.  All these are merely suggestions and not all of the tax reliefs I’ve described will apply to you.  Some of them involve making investment or spending decisions, and you should get professional advice.  Never make a claim for something not properly due – it can be an expensive mistake to fix. Big Ticket Items EII Scheme The Employment and Investment Incentive (EII) scheme gives investors an income tax deduction on risk investments of up to €150,000 per annum in companies that qualify.   You initially get tax relief on your investment at 30% with a further 10% top up relief available if the company meets employment or R&D targets.  How - Applications for the EII Scheme can be submitted through MyAccount or on ROS. Pensions No matter whether you’re self-employed or an employee, pensions remain one of the most tax efficient investments you can make.  Premiums paid by an employee to a Revenue-approved pension scheme, or by a self-employed person under a Retirement Annuity Contract (RAC) are allowed as an income tax deduction in the calculation of an individual’s income tax liability. This is why the pension deduction is so valuable - it gives relief at the individual’s top rate of income tax.  Of course there are restrictions.  The maximum allowable deduction depends on both your age and your earnings, and there are special rules for calculating the earnings limits.  In general there is an annual earnings cap of €115,000.  When it comes to pensions planning it is important to get professional advice to suit your circumstances.  It’s not just about tax but also about having an appropriate strategy for your retirement. How – This depends on the type of scheme you sign up for and your pension adviser can help.  PAYE taxpayers in occupational schemes usually have the tax relief applied through payroll. Employment of a Carer for an incapacitated person If you employ a carer to take care of a family member who is totally incapacitated you are entitled to a deduction against your income tax paid of up to €75,000 at your highest rate of taxation.  Where this cost is shared by family members, each member can claim in proportion to the amount borne by each.   How - You can use myAccount to claim the relief or you can make a claim on your tax return. Start your own business relief If you are long-term unemployed and wish to start your own business, this scheme means you don’t have to pay income tax on profits for two years up to a maximum of €40,000 per year.   You must be unemployed for at least 12 months prior to starting the business, and the scheme is due to end on 31 December 2018.  There are some conditions and requirements to this relief but in summary the business must be a new business and must not be set up through a company.  How - This relief must be claimed on the self-assessment tax return Form 11. Help to buy incentive (HTB) This may apply if you are a first time buyer and you bought or self-built a new residential property since 19 July 2016.  You may be entitled to claim a refund of income tax and DIRT paid over the previous four years, subject to a maximum tax refund of €20,000 and some other terms and conditions. How - Use myAccount or ROS.  There are two stages to the online process; the application stage and the claim stage. For the application, you must complete a declaration, selecting the years you want to use the refund. You will receive an application number and a summary of the maximum amount you can claim – keep these safe as you will need to provide them to your lender, contractor and/or solicitor. You can then make your claim once you have signed the contract for your home or drawn down the first part of your mortgage, if you are self-building. Home Renovation Incentive (HRI) Improving your home?  You may be entitled to claim an income tax credit of 13.5% of the money you spend on painting and decorating, plastering, plumbing, tiling, extensions and garden landscaping.  Landlords may also be able to claim a tax credit under this incentive.  The tax credit can be claimed on expenditure over €4,405 up to a maximum of €30,000 (before VAT) spread over two tax years.  Some conditions apply, the main one being that the contractor must submit details of the work done via the Revenue online HRI system before you can make the claim.  The relief is expected to run out at the end of 2018. How - To claim the credit, use the HRI online system through myAccount or ROS and make a claim on your tax return. Rent a Room If you rent out one or more rooms in your home you can take in up to €14,000 each year free of tax.  The €14,000 limit also apples to money you receive for food, laundry or similar goods and services, so student digs are covered.  The relief applies on the gross amount you receive, before deducting any amounts for your own expenses.  But beware of going over the €14,000 limit. If you do, the entire income is taxable. How - You must file an income tax return to claim this relief.  Go to the ‘Exempt income’ section of your tax return.  Life Assurance to help with Inheritance tax The proceeds of certain life insurance policies, known as Section 60 policies, can be exempt from inheritance tax.  Think of it as a way to help your beneficiaries to pay their inheritance tax without having to break up your estate to meet the tax bill. Just make sure that the insurance policy is in a form approved by Revenue. How – Discuss this one with your financial or legal adviser. More routine credits and reliefs Tax Saver Commute Your employer can buy a monthly or annual travel pass for use on the bus, train, Luas, DART and ferry for you, thereby saving up to 52 percent (tax, USC and PRSI) on the regular cost of your travel ticket depending on your tax bands.  How - Check that your employer is participating in the scheme and follow any conditions or procedures your employer might have in place.  Cycle to Work Tax relief is available under this scheme for the cost to the employer of providing a bicycle and safety equipment for the employee.  The maximum cost qualifying for relief is €1,000.  So if your employer purchases a bicycle, helmet and lights for a total of €1,000 on your behalf, the net cost to you (assuming 40% tax, 8% USC, 4% PRSI) will be €480.  How - Depending on the way your employer operates the scheme, the tax relief is usually operated through payroll.  Work expenses Revenue have arrangements in place to grant so-called “flat rate” expenses for employees working in a range of activities.  Nurses, optometrists, panel beaters, grooms, musicians, journalists and air crew, to name just a few, may claim for a fixed amount of expenses provided certain conditions are met.  How - The easiest way to check if you are eligible is to search for “List of Flat-Rate Schedule E Expenses” on the Revenue website.  There is no need to keep receipts to claim this relief.   You can claim this relief on your tax return.  In limited circumstances, other expenses of employment can be claimed if you run them up “wholly, exclusively and necessarily” as the rule puts it.  But this can be very difficult to establish to Revenue’s satisfaction.   Medical Expenses Relief may be claimed as a tax credit for medical expenses paid by you for yourself or for others.   Where you pay expenses for someone else, you don’t have to be related to the person; as long as you paid for them you can claim relief. Expenses qualifying for the relief include doctors’ visits, consultants’ fees, prescription medicine, physiotherapy, and routine maternity care.  Some expenses incurred abroad, including certain travel costs can also qualify for the relief.  The tax credit is 20 percent of the amount of medical expenses incurred which have not been reimbursed, so you can’t include amounts refunded by the likes of VHI, Irish Life Health, GloHealth or LAYA Healthcare in your claim.  How - To claim, log onto myAccount and enter the amount incurred in a particular tax year; or make a claim on your tax return and remember you can go back and claim for the last four years.  There is no need to send Revenue your receipts.  Just make sure you keep them somewhere safe for at least six years, because Revenue may ask for them at a future stage to back up your claim.  A handy way to keep a digital record of receipts is by using Revenue’s Receipt Tracker on “RevApp”.  You have an option to store them on your device or in Revenue cloud storage.   If you keep the receipts in cloud storage, you do not need to keep paper copies. Dental Expenses Tax relief is also available for the cost of some dental treatments. Only non-routine treatments qualify for relief; for example crowns, veneers and orthodontics.  Routine check-ups and fillings unfortunately don’t qualify. Just like medical expenses, the tax relief is by way of a tax credit equal to 20 percent of the amount you pay excluding any amounts reimbursed.  Therefore, if you have paid €1,000 to have a crown fitted this year you could claim relief of €200 from Revenue.  How - You can do this as part of your medical expenses application as described above.  Your dentist can provide you with a Form MED 2 setting out the dental treatments that qualify for relief.  You must keep this Form Med 2 as Revenue may request it to verify your claim.  Nursing Home In the case of nursing home costs, you can claim tax relief at your highest rate of income tax (40 percent) if you paid nursing home charges, to a home that provides 24-hour nursing care on-site, for yourself or on behalf of somebody else during the year.  Any amounts paid over and above the Fair Deal Scheme are also allowed at your highest rate of income tax. How - You can claim tax relief for nursing home fees as you do for tax relief on medical expenses. Annual Gift Exemption Anyone who receives a gift from another person may be subject to capital acquisitions tax of 33%.  However, every individual is entitled to receive gifts to the value of €3,000 from another person every year without any tax consequences.  For example each parent can gift up to €3,000 per year in cash to a child to help them build up some cash.   How - You can claim the annual gift exemption on your gift and inheritance tax return. College Fees Going to third level, or funding someone going to third level?  You may be able to claim tax relief at 20 percent for tuition fees paid for in respect of third level colleges, as long as the fees are fully paid and don’t exceed €7,000 per annum per student.  The relief applies to tuition only – it does not cover administration, examination, accommodation or registration fees.  Relief isn’t available if part of the tuition is funded by a grant, scholarship or employer.  If fees are paid in instalments, tax relief can still be claimed once paid. Each claim (not each course) is subject to an annual disregard amount of up to €3,000.  If you have paid fees for more than one student, you only subtract the disregard amount once from your annual claim.  Revenue publishes a list of colleges and courses eligible for this relief on www.revenue.ie, and they also publish some examples of how to calculate the claim.  How - Log onto MyAccount and complete a Form 12 tax return for the year you wish to claim for.  If you make a claim for tuition fees, you must keep a record of the receipts for 6 years. Incapacitated Child Tax Credit This credit is available if you are a parent or guardian of a child who is physically or mentally incapacitated.   The credit available for 2018 is €3,300.  You may claim the credit for more than one child and where the child is maintained by more than one person, the tax credit is divided between them in proportion to the amount paid by each towards the maintenance of the child.  This credit is in addition to the relief you might be due for medical expenses you incur for the child. How - Log onto MyAccount and enter the amount incurred; or make a claim on your tax return.  You also need to complete two forms; ICC1 and ICC2, and keep a record of these forms for six years. Smaller reliefs, but better to have them in your pocket than not Dependent Relative If you care for a relative who is unable to look after themselves independently due to old age or illness, you may qualify for the Dependent Relative Tax Credit which is currently €70 off your tax bill.  For the current year, this credit cannot be claimed if the income of the relative exceeds €14,753. If there is more than one claimant, the credit is shared based on the amount each contributes to the maintenance.  You can also claim credit for any medical expenses paid for your dependent relative. How - You can use MyAccount to claim this credit by completing a Form 12 tax return at the end of the year. Training Courses If you are thinking of taking a course in information technology or foreign languages, or have already done so, you may be able to claim tax relief on fees paid.  You can also claim relief for fees paid on behalf of another person.  Relief is given as a tax credit equal to the fees paid at the 20 percent rate of tax; the fee must be at least €315 subject to a maximum fee of €1,270.  The course must be an approved training course, less than two years’ duration, and award a certificate of competence, a certificate of attendance is not enough.  Revenue publishes a list of approved foreign language and information technology courses and providers on their website at www.revenue.ie.  How - The process to claim tax relief for training courses is the same as the process set out above for college fees. Annual Capital Gains Tax Exemption If you sell shares or other assets and make a gain, the first €1,270 of the gain is exempt for capital gains tax purposes.  Now that asset values are recovering while the CGT rate remains at 33%, don’t overlook this annual exemption as there is no formal process involved in claiming the exemption as with many of the other reliefs we have gone through. How – Include the exempt amount as part and parcel of your CGT calculation Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Sep 03, 2018
Tax

Sunday Business Post, 26 August 2018 Martin O'Donoghue, a key figure in the formulation of Irish economic policy in the late 1970s, passed away a few weeks ago.  His work formed part of an emerging pattern to the budget cycle in this country.  Every 10 years or so, we seem to have embarked upon major change and major reform.  The end of the 1980s was the era of Ray MacSharry and expenditure cuts.  The end of the 1990s was the era of Charlie McCreevy and the significant reforms he made to the capital and income tax regimes (remember individualisation?).  The late Brian Lenihan, at the end of the first decade of this century, was forced to introduce tax corrections to pay for the otherwise unsustainable expenditure commitments of his predecessors and rescue a dysfunctional banking sector.  If that ten year cycle were to continue, we could confidently forecast major tax policy changes in the next Budget.  Will Paschal Donohoe be the author of another grand climacteric in Irish fiscal policy?   Judging by his comments to date, the Minister has a fairly clear idea already of the shape of the next budget process.  He works in a government which is constrained not just by the fiscal rules of the Eurozone, but also because being in a minority, it has to preserve the principles of the confidence and supply arrangements with Fianna Fáil.  Confidence and supply is scheduled to hold until after the Budget for 2019, which we expect will be announced sometime in mid-October.   All things considered, the current government’s budgetary policy has stuck closely to the commitments made in the confidence and supply agreement.  For instance there is a commitment to a Rainy Day fund.  The plans to reduce USC have mutated into a debate about the merging of USC and PRSI to come up with some overarching system of funding social protection.  This approach is also consistent with the confidence and supply commitment to reform PRSI for the self employed.  Paschal Donohoe, as the minister with the recombined portfolios of Finance and Public Expenditure and Reform seems to have a keener degree of interest in the latter rather than in the former.  That apparent preference for spending policy over tax policy is filtering down into civil society, with groups as diverse as Social Justice Ireland and even IBEC not prioritising a need for general income tax cuts.   Across the world, governments are tapping into disgruntled middle-class Conservative rump for the support.  In their own way, Erdogan in Turkey, Modi in India and Trump in the US are prioritising the concerns of this group.  There is no reason to believe that a current Irish government or a putative future Irish government should overlook the same cohort of voters.  Their concerns were disregarded at the last general election, and both Labour and Fine Gael suffered for it.  That cohort does require some progress on reducing the burden of income tax, particularly those on the margin of income around the industrial average wage where the tax knife on their wages sharpens to 40% from 20%.  Indeed, at the National Economic Dialogue held in June of this year, the Minister himself signalled that changes to the income bracket where the 20% band applies are very much on the agenda.   There are more people in work now – 200,000 more than at the time of the last general election. With stronger economic growth, modest increases are appearing in the pay packets of workers.  If however the tax bands and allowances don't keep pace with such modest increases, the net effect is a higher burden of taxation.  This isn't just an academic economic calculation.  It makes a real difference to take-home pay, and in fact is intended to raise revenue as set out in the Programme for Partnership Government.  It may be both thoughtful and noble for civil society commentators to eschew income tax cuts in favour of improved social spending.  But that won't win votes.   Rather than the major reforms we come to expect at the end of successive decades, the next budget will inch us further along the path of fiscal righteousness.  I think workers will be a little bit better off, and businesses will be expected to continue to grow with the mediocre tax reliefs for investment and gains currently available.  I expect there will be some tinkering with the 9% VAT rate for hospitality and other activities, and some move towards carbon tax reform where  increases seems inevitable.   International reputation seems to be a particularly sensitive point for the current Minister and perhaps the only major talking point after the next budget will be a further series of reforms to the way companies in this country are taxed.  The reforms proposed both in the Coffey report and more latterly by the Public Accounts Committee to ensure we are on a par with international best practice will undoubtedly be examined and progressed.  Minority governments tend to be paranoid about not going about fixing what is not broken.  The current Minister doesn't have the same latitude for reform as O’Donohoe and McCreevy in their time because of EU rules and fiscal constraints, but nor does he face the same crises as McSharry and Lenihan did.  He will want to keep it that way.  Budget 2019 will not perpetuate the ten year pattern of major tax reform.  Brian Keegan is Director of Public Policy and Taxation as Chartered Accountants Ireland.  

Aug 27, 2018
Tax

Sunday Business Post, 12 August 2018 There is a website called willrobotstakemyjob.com, a visit to which could cheer you up greatly or make you profoundly gloomy, depending on your chosen career.  It's an output from the Martin School at the University of Oxford where researchers are looking at how susceptible some jobs are to computerisation.  According to the research, if you're employed in any area which requires analysis or creative thinking, your job should be OK.  On the other hand, if your profession requires routine, repetition and is largely rules based, you're in trouble.  This analysis suggests that the outlook is particularly grim for people in the accountancy profession.  It's even worse for those specialising in doing people's tax returns, where the suggestion is that this kind of work will be almost entirely replaced by automation.  Of course such predictions can be wrong.  A greater possibility is that they may also miss the evolving nature of professional work.  For example there aren't nearly as many fax machine installers now as there were 25 years ago.  But equally there is a significantly larger number of wifi engineers.  The encroachment of automation already on the tax profession is very real.  It is most pronounced in China and in some of the emerging economies in Eastern Europe.  Starting off from a relatively low base, revenue authorities in these countries have invested heavily to automate tax returns, calculation and charging processes from start to finish.   The UK revenue authority HM Revenue and Customs is developing a particularly ambitious project called Making Tax Digital.  Their notion is that over the next several years, all businesses of any size will have to have their accounts packages fully integrated with the tax assessment and collection systems.  This will ultimately eliminate the need for tax returns of all types – corporation tax, VAT, PAYE and the like – for most businesses.  The potential for under declaration and evasion will, the UK revenue authorities believe, be significantly reduced through this new technology.  On this side of the Irish Sea, the Irish revenue will be implementing PAYE modernisation with effect from next January.  This project also involves systems integration – this time between an employer’s payroll system and Revenue's records.  It's not quite true to say that Revenue will become payroll operators for the nation, but it is not too far off the mark.  Every time an employee joins or leaves the company, Revenue’s systems will be automatically updated.  This is a considerable additional compliance burden on Irish businesses, which cannot entirely be automated away.  Automation isn't the cure for all ills when it comes to tax administration.  We are some distance from a situation where the machines will do all the calculations, no matter how complicated the underlying tax policy, and the current position in the UK bears that out.  The UK tax self-assessment system is highly complicated in comparison with most other systems in developed economies.  Recognising that, the UK government has established Office of Tax Simplification to suggest ways of better coping with the (approximately) 1,000 different tax reliefs and allowances currently available to UK taxpayers.  The UK self-assessment systems are groaning under the weight of complexity and number crunching.  The list of circumstances which the UK revenue's tax software cannot deal with grows every year.  It’s tough being a robot sometimes.  Businesses and the accountants who advise them will find themselves working within a gap created between the aspirations of automation, and the reality that politicians love tinkering with the tax system.  It's not just tax policy which is getting more complex; business practices are becoming more complex as well.  As business becomes increasingly international, the complexity of cross-border transactions grows.  New concepts must be addressed.  Revenue authorities across the world are only now issuing policy statements about how they would deal with crypto currency transactions, even though the likes of Bitcoin have been around for the best part of a decade.  Even though the need for an accounting profession is not going to go away anytime soon, the skill sets will undoubtedly have to change.  Many of the skills currently applied in interpreting the law will have to be re-directed towards interpreting the particular analysis of the law being built into revenue authority computer systems.  The skills used in verifying the accuracy of tax returns will in future be used to verify that the calculations and charges imposed by Revenue properly reflect the underlying activity of the taxpayer and their business.  However the capacity of a professional tax advisor to negotiate with Revenue will remain unchanged.  The need to be able to analyse a new business venture and identify the tax compliance requirements will not change either.  The result of all this effort is that tax evasion will become almost impossible as every transaction leaves an electronic footprint for Revenue to track.  Computers will do most of the tracking.  If the Oxford academics are correct, accountants and tax advisers are indeed doomed; but doomed I think only to a different way of doing their work in the future.  Many professions face much worse prospects.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Aug 16, 2018
Tax

Sunday Business Post, 29 July 2018 Perhaps a big part of the reason English has become the default language for much international trade diplomacy and culture is the capacity of its speakers to borrow.  No word for night attire, or no word for a single-storey house?  Well then, borrow pyjamas and bungalow, both from India.  As a general rule, borrowings of words like pyjamas and bungalow (and even smithereens from Irish) used in former British colonies become fully assimilated as proper English words.  But English seems to keep its distance with other borrowed words by insisting on inverted commas or italics to denote their alien origins and genesis within a different mindset, hence terms like schadenfreude to connote malicious glee.  Some concepts can only be adequately described in another language.  So what word can be used to describe the latest EU enquiries into the conduct of the UK which were buried beneath the clamour of the Westminster chaos of the last fortnight?  Maybe schadenfreude.  Certainly chutzpah.  Is the Commission totally politically deaf to the Brexit scenarios now unfolding? A New Phenomenon? It is curious how little the EU institutions seems to care about Brexit.  This is not a new phenomenon.  Prior to the 2016 Brexit referendum, the then UK Prime Minister David Cameron went to Brussels to try to persuade the Commission to deliver some concessions which would sweeten the referendum debate and help ensure that the United Kingdom remained in the EU.  He didn't come back with very much in February 2016.  There was an agreement that EU aspirations for closer member country unity would not apply to the UK.  Also the regulatory dividing lines between the City of London and the Eurozone were strengthened.   But Cameron made little ground in the critical area of limiting the provision of welfare benefits by the UK to EU migrants, and this became a toxic element within the Brexit referendum campaign.  Contrast those limited concessions to the gymnastics the EU institutions have been capable of performing to keep Greece in the Eurozone, or to ensure that the EU state aid rules which are designed to maintain a level playing pitch for business did not prejudice German reunification.  How different might the Brexit referendum campaign have been, had Cameron received the same degree of flexibility? Consistent At least the Commission rigidity towards the UK is consistent.  Just last week the Commission announced it would be chasing the UK for three separate alleged breaches of EU tax rules.  The first of these has to do with how the VAT system is operated.  The Commission is maintaining that the UK isn’t providing the other member countries with enough information to deal with cross border VAT refunds, in breach of EU regulations on cooperation.  The second has to do with the UK seeming to offer better tax relief for losses on shares in UK businesses than for losses on shares in EU businesses.  The last alleged breach is similar to the second, except this time involving the tax relief available on bad business loans where a lender is better off having loaned to a UK business than to an EU business.   In the overall scheme of things these breaches, if they are indeed breaches, would seem to be relatively minor and technical in nature.  Yet they are corrosive at a time when the UK is putting forward plans for its future relationship with the EU.  Those UK plans, if adopted, would involve a high degree of trust between Brussels and the UK in the administration of VAT and customs.  Countering Speculation On Tuesday this week, Jim Harra who is the deputy chief executive of the UK Revenue authority HM Revenue and Customs, had a letter published in The Times newspaper.  He was attempting to counter speculation that his organisation would not be capable of dealing with future Brexit related obligations, and referred to customs obligations in particular.  This latest round of EU infringement proceedings do little to help Mr Harra’s case.  More significantly, they do little to help the current round of Brexit negotiations between the EU chief Brexit negotiator Michel Barnier and the UK team, now led by the Prime Minister. The authorities within the EU charged with policing member country activity, like the State Aid division headed by Margrethe Vestager or the tax and customs division headed by Pierre Moscovici, are formidable adversaries.  Within their policy remit, arguably they do a good job and the rules can’t just be suspended to suit the priorities of the day.  But how sensible is any policy which prioritises the functioning of the single market rules above a unique political crisis among the EU Member States?  As Michel Barnier has observed, he wants to ensure that the Brexit negotiations are unique – a once off event.  Are his former colleagues in the Commission really helping him when they raise minor breaches against member countries already struggling with the rules?  The European Union is a tool for its members, not a stick to beat them with.  The infringement proceedings launched against the UK last week do not make the UK decision to leave the EU more justifiable, but it certainly makes it more comprehensible.  English has had a word of its own for such EU proceedings since the 16th century.  The word is crazy.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Jul 30, 2018
Tax

Sunday Business Post, 22 July 2018   As a negotiating party to this whole Brexit business, the European Union can only play with the hand it has been dealt.  At this stage in the negotiations, that hand is the Chequers “Future Relationship” White Paper.  If only for the purposes of the EU/UK negotiations, the current White Paper has an existence outside of the shenanigans of Westminster.  While there may be squabbles over who cut the deck of cards in the first place, or indeed whose turn it is to deal, the hand that has been dealt to Michel Barnier and his negotiating team remains the White Paper.  The close run votes this week were over (relatively) unimportant items of procedural legislation designed to keep regulatory and economic processes in Britain on the road after the current governing legislation from Brussels ceases to have effect. Take the UK Trade Bill for instance.  Judging from media reports, how the Bill made its way through the House of Commons would seem to be nothing short of miraculous.  But the Bill itself only comprises a handful of clauses, and almost all of them are of a technical nature.  The most significant of these gives the UK revenue authority HM Revenue and Customs greater powers of enquiry over UK traders.   And as to the White Paper itself, its most striking aspect is how little the UK position has really changed from the original 12 priorities set out in the Lancaster House White Paper back at the start of 2017.  The language has moved on and become clearer, and the emphasis has moved away from principles and more towards practicalities.  Fundamentally though, what the UK is asking the EU to consider is not materially different.  What is materially different is the attitude between early 2017 and now.  It seems to me that the coin is finally starting to drop with MPs as to the real implications of Brexit on their supporters and on their constituencies.  Brexit is something to be fought over.  We are seeing MPs, previously unknown outside their constituencies, wheeled out to explain their voting decisions and intentions in terms of how it will affect the industries and jobs in their constituencies.  Party loyalties are no longer sacrosanct.      The only region of the United Kingdom where a journey from the Brexit ideal to the Brexit pragmatic does not seem to be happening is in Northern Ireland.  The DUP position seems to be resolutely nailed to some kind of Brexit “full departure but keep the status quo” ideal.  The Sinn Fein position is not represented at all where it counts and at a time when it could make a real difference - at a division in the House of Commons.  If some kind of epiphany is indeed taking place in UK politics, it's an epiphany which is almost two years too late.  It is possible that the UK will be able to formulate a coherent negotiating platform, negotiate a proper withdrawal agreement and future relationship with European Union, and sell this back to Parliament and to its electorate at large.  It is not possible that this can be achieved between now and 29 March 2019 which is the only reliable Brexit deadline enshrined in law.  This makes it worthwhile to re-examine the provisions of Article 50, the infamous element of the EU treaties which permits the withdrawal of an EU member country from the European Union.  Article 50 permits an extension to be granted on the notification period – that is say the time interval between the formal notification by the UK of its intention to leave (which it made on 29 March 2017) and the departure date itself.  It is possible for the remaining EU members, if they wished, to unanimously grant a further extension to the UK beyond 29 March 2019, during which time the UK would remain a full member of the European Union, until it got its act together on the negotiation front.  This must now be worth considering.  Positions are changing, and not just in the UK.  The Irish government seems to have more or less set aside its laissez faire “you broke it you fix it” policy in favour of announcing the arrangements being put in place in contemplation of future Brexit outcomes.  The position of the EU Barnier negotiating team seems to be getting more and more nuanced, with less emphasis on red lines (in public at least) and more emphasis on practical post-Brexit arrangements and concessions.  Attitudes towards Brexit which had been informed by arrogance and complacency are now being directed more by pragmatism and fear.  No UK government really wants to crash out of its international obligations and trigger an economic downturn which it could take several generations to forget.  No Irish government wants to be remembered as the government which was in power when border controls were re-introduced on this island.   If the Chequers White Paper has achieved nothing else, it has rattled the UK establishment and has brought other options into the discussion, including the possibility of a second referendum. Pausing the Article 50 clock might give everybody a chance to regroup.  A further UK extension, without penalty, might be a hard sell to the other EU member countries, nor would it be well received among all elements of the UK political spectrum.   Nevertheless there are worse cards to play.  The EU institutions will be encouraged by having already secured their own ultimate Brexit red line.  No other member country looks likely now to leave.  Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Jul 23, 2018
Tax

Sunday Business Post, 15 July 2018  It's dangerous to read too much into any aspect of current Brexit manoeuvrings, given that the situation on Brexit is changing almost at an hourly rate.  But I was struck at the reports of one particular threat levied at government ministers when they met in Chequers last week to discuss the Prime Minister's latest Brexit scheme.  Chequers is a good distance outside of London, about 40 miles to the north-west.  Any minister not playing ball at the cabinet meeting and opting to resign would have to make their own way home.  Use of the ministerial car would be withdrawn with immediate effect.  Though presumably any resigning Minister would have been able to cadge a lift from a sympathetic former colleague, the threat underlined just how remote the policy decision making process can be from the lot of the worker.  No matter whether a hard, soft, chaotic or frictionless Brexit is agreed, it would be unlikely that any senior government figure from either side would have to queue for hours at passport or customs controls as a consequence of their policy decisions.  VIPs will still be ushered past checkpoints and will certainly be unaffected but there will be no special provision for HGV drivers (for example) at the new and hastily assembled customs checkpoints that will be the inevitable consequence of a hard, no deal Brexit.   Mind you, there has been a long-standing tradition of distancing the great and the good from the ordinary worker.  Country estates were sometimes designed so that the local gentry would not be burdened by the sight of mere workers going about their duties – the likes of Tullynally Castle in Co Westmeath is a fine example of a residence carefully designed to ensure that those privileged to live in it would never see those they were employing. However, if there is still blindness in some quarters to the lot of the worker, the situation isn’t helped by the difficulty of identifying exactly what being a worker now means.  The classical line between the employee providing services under an employment contract, and the self-employed worker is increasingly blurred.  Some of this blurring is due to the rise of technology.  The permanent and pensionable model associated with many public sector and blue chip private sector jobs is less prevalent.  An increasing number of employees are in non-standard, non-traditional forms of employment, the so-called “gig economy”.  Rather than work within set times and for set benefits including holiday pay and pension entitlements, more and more people are working on an ad hoc basis.   While this type of work is sometimes described as zero hours contracts working, most people on variable working hours are not working so-called zero hours contracts but are working “if and when” type contracts.  It's an important distinction, highlighted by research from the University of Limerick published some time ago.  Under zero hours contracts, an employee is required to be available for work even if the work is not available.  In comparison, under if and when contracts, while there is no particular obligation on the employer to offer working time, neither is there a particular obligation on the employee to take it up if work becomes available.   If and when contracts make for more flexibility for employers and indeed can suit many employees alike, but it’s not all plain sailing.  Flexible work arrangements don’t just impact job security, maternity and paternity rights, sick pay and softer benefits such as career progression and training.  There are also tax implications.  In a previous era, the concern would have been to establish that a person was not an employee, to the benefit of the hirer.  More recently, the courts have been considering cases where the individual was trying to confirm their status as an employee to the benefit of the worker.  Last month, the UK Supreme Court gave a judgment in a case involving a plumbing and heating engineer, who although he paid his tax as a self-employed person, was found to be in employment.  This in turn would permit the plumber, a Mr Smith, to pursue his case for disability entitlements against the company found to be his employer, Pimlico Plumbers Ltd.   If the incidence of non-standard employment increases, cases like the Pimlico Plumbers case will be more common and this June 2018 case from the UK’s highest court will set an important precedent.  Irrespective of their employment status, workers need to know not just what they are paying in tax and PRSI, but also what they can expect from the state and their employer as a consequence of their labour.  There is a wider implication as well.  The PRSI system is currently under review by government.  One idea is to merge the USC and PRSI systems, which suggests that the emphasis could be on collection systems without due regard to the impact on the employment and entitlement status of the worker, be they employed or self-employed.  This is one piece of policy making which must not be blind to the needs of people working in this economy.  A reform of PRSI without reference to the benefits which should flow from it would be unacceptable.  Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland

Jul 16, 2018
Tax

Sunday Business Post, 8 July 2018 Shakespeare maintained that there were seven ages of man, sweeping across from cradle to grave.  As in so many things, he may well have been right (even if he did exclude women from his reckoning) but a working life can be divided in many other ways.  There are the two ages to a working career; the age in which one is indifferent about retirement and the age when retirement, and how to pay for it, becomes all consuming.  In my experience a fascination with retirement and pensions kicks in at the later career stages, by which time little extra can be done in terms of pension provision.  Even if you're not at that particular point in your career, don't look away now because promised changes coming down the line will affect people at every stage.  At its simplest, a pension is about spreading earnings beyond the span of the working career to include the span of retirement.  It has three elements – a method for saving some income to be spent post retirement, a way of investing those savings, and finally a way of accessing the benefits from the pensions savings made during the working career when in retirement.  Nothing could be simpler? You would think nothing could be simpler, yet successive years of pensions policy has made providing for retirement mercilessly complicated.  Schemes which guarantee a pension income (defined benefit schemes) have different rules to those which do not (defined contribution schemes).  The pension system also succumbs to a pitfall of the tax system by being overly concerned with how people earn their money rather than how much they actually earn.  Hence the pension rules distinguish between the self-employed and employed people in the public sector and in the private sector.  On top of all that, there are distinctive rules for how money put aside for a pension is to be invested and taxed, and other special rules governing pension payments post retirement. The pension funding situation is getting worse for reasons that cannot really be controlled by the worker.  The era of permanent and pensionable work – a job for life – is largely over for most people in the private sector.  I am somewhat wary of statistics and surveys in this area (they tend to be generated by recruitment agencies) but more official surveys such as those carried out by the US Bureau of Labour Statistics suggest that most workers will change jobs and careers multiple times.  That makes longer term pension planning more difficult and it can also mean that workers at retirement age will find themselves as beneficiaries of several small pension schemes rather than one large pension pot. Also we are all living a better quality of life for longer.  That means that whatever the size of the pot of pensions savings at retirement, it is likely to be spread more thinly.  And lastly the traditional method of providing a private pension, which was to use the pension pot on retirement to buy an annual income known as an annuity, is no longer cost effective.  That has more to do with the state of capital markets than anything else.  Consultations The recently formed Irish Interdepartmental Pensions Reform and Taxation Group is currently carrying out a series of consultations, in part at least to see how the current convoluted system could be simplified.  Pensions simplification isn't just an aspiration for a tidy mind.  People are uncomfortable with complexity, and less willing to make savings and investment decisions under a regime which they don't fully understand.  Women can be at a particular disadvantage as they are more likely to have broken employment histories due to caring responsibilities.  The whole project is backed by a government “roadmap” for pensions reform.  We have seen such plans before, which largely have resulted in very little change.  While the current minority government can't deliver very much, it hopefully will set a reform agenda for future administrations to follow.  One of the more interesting (though not entirely new) aspects of the roadmap for pensions reform is the notion of automatic enrolment.  Automatic enrolment involves signing people up to pensions contributions from the time they start their new job.  The rationale is that more people will remain in a contribution mechanism automatically set up for them (though they can opt out) than will go about setting up a pensions scheme for themselves.  This logic has been validated in New Zealand and in the UK, where auto-enrolment works as a useful policy tool for encouraging pension contributions.  All to the good While this is all to the good, we are still a long way from addressing the situation that only one in three private sector workers are making their own provision for retirement on top of the contributory state pension.  More people need to do so.  There is an undertaking in the pensions reform roadmap that the state pension will not fall below one third of the average industrial wage.  While that's good news, it needs to be seen in perspective.  The trade union supported calculation of the minimum living wage level by the Living Wage Technical Group has just been revised up to €468.82 per week.  The current maximum contributory old age pension is €243.30.  That’s quite a gap.  The strongest signal from the current government’s pensions roadmap is that simplification and incentives for pensions savings are what are required now.  That is also to the good because there must not be threats to reduce the tax and investment rewards currently in place for those who are making the effort to fund their own retirements.  What would be the point of encouraging more people to save for pensions, while at the same time penalising those already doing so?  It would only add a third age to the working career – an age of complete confusion as to the right thing to do when preparing for retirement. Dr Brian Keegan is Director of Tax and Public Policy at Chartered Accountants Ireland    

Jul 09, 2018
Tax

Sunday Business Post, 1 July 2018 American business has a directness of approach which many of us in Europe would do well to copy. President Trump imposes tariffs on steel and aluminium imports.  The EU retaliates by applying tariffs on a range of All-American products – sweetcorn, cranberry juice, bourbon whiskey, cotton goods, motor bikes and (bizarrely) playing cards.  If Mom’s apple pie had a separate customs classification, it would surely have been included.  American business immediately responds.  This week Harley-Davidson states that they may have to ramp up their production levels outside of the US to sidestep the imposition of the tariffs.  Rapid change, direct response. Does European business do direct?  We’re just past the second anniversary of the Brexit referendum.  European industry found out these days two years ago that the introduction of tariff barriers (which are a strong possibility) and VAT barriers (which seem inevitable) between trading partners in the UK were imminent.  Given that the UK is Europe’s second largest economy the business response from either side of the Channel has been strangely muted.    A few major companies have finally started voicing very strong concerns about their position post Brexit.  I don't think it's a coincidence that it is automotive manufacturers who are leading the charge against Trump, EU and Brexit inspired tariffs.  It’s BMW in Europe, Airbus in the UK, Harley Davidson in the US.  The cost of tariffs, both in terms of cost and delays, spirals rapidly out of control when applied to factory-made goods.  Complex products like cars, aeroplanes and motorbikes are made from commodities or have components which in their “raw” state are often subject to individual tariffs on import.  The American penchant for directness was also evident when comparing government responses to industry concerns.  In a tweet, President Trump accused Harley-Davidson of hoisting the white flag.  The response from Westminster ranged from dismay, that British industry might be making threats (via UK cabinet minister Jeremy Hunt), to conciliatory noises about listening to concerns (via Downing Street), to the fit of invective apparently directed at business generally by the Foreign Secretary Boris Johnson.  But what did either government expect from their industry leaders?  Tax is a cost to business.  Customs duties and tariffs are taxes.  Like any other business cost, business will try to manage their exposure to taxes.  It is inevitable that businesses will take steps to minimise their exposure to customs, just as it is inevitable that businesses will try to cut the best deals with their suppliers, contain their wage costs and seek customers in the most lucrative markets.  The response of government to industry concerns may also be informed by very real and pragmatic concerns over border enforcement.  The Trump and EU tariffs can have immediate effect because they are layered on top of a customs infrastructure that already exists.  There is no free trade between the US and the EU in the same sense as there is free trade between EU member countries – our trade with the US does not enjoy the liberties of the EU customs union.  There is a checking and charging system in place at the ports and airports.  New or additional tariffs can be imposed quite readily by the authorities on both sides; by the US directly, and by Brussels through having the customs authorities of the 28 EU member states act as its customs agents.   If Britain leaves the EU without a customs deal there won’t be that same ease of application of new tariffs.  A whole new set of customs controls will have to be introduced at EU ports, airports and most significantly for Ireland, at land borders.  No matter how clever or well resourced, the new customs inspections and checks between the UK and the EU will take time to bed down.  It will surely follow that the evasion of customs, better known as smuggling, will be a significant problem for both the UK and the EU in the aftermath of a British departure from the customs union.   Some of the smuggling will be unwitting as businesses, unfamiliar with the new obligations, will misdeclare the goods being imported or exported.  Some of it will be intentional.  EU Commission President Juncker’s expression of solidarity with the Irish position on Brexit, when he visited Dublin last week, was undoubtedly sincere.  But it is no harm either that such EU solidarity is informed by pragmatism, as Ireland will have a major part to play in enforcing the EU Customs border with the UK.  Enforcement is just one aspect of a properly functioning customs compliance environment.  Businesses tend to be better disposed to tax compliance when their futures are not at stake.  Any introduction of customs tariffs between Britain and the EU will drive many businesses against the wire.  Further, while business leaders who flout the law rightly face a loss of reputation and standing as well as civil or criminal penalties, I suspect there won’t be the same level of public opprobrium towards business leaders who fall foul of any new Brexit tariffs.  Many people might be sympathetic to shortcuts being taken. We can expect to see a lot more businesses across Europe express concern and criticism over the direction their political leaders are taking in pursuit of Brexit.  National solidarity has its limits.  As commercial concerns grow, more European companies will react like their American counterparts do and vocally point out the errors in the policy of their governments.  On recent experience the Europeans will just be a bit slower about it. Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland  

Jul 02, 2018
Tax

 Sunday Business Post, 24 June 2018 The English novelist Henry Fielding was at his best when pointing out that prudence is a virtue most often exercised by those who have no choice except to be prudent.  The word “prudent” appears 10 times in the government's Summer Economic Statement (SES) which was published this week.  It seems this government is going to be terribly careful at the next Budget.  We are not going to be lured anymore by the prospect of largesse from the fiscal space, the amount which the EU rules will allow the government to spend including new borrowing.  Instead we shall be guided by principles of debt reduction and rainy day funds.   There can be no doubt at this stage that we live in a recovering economy.  As the SES points out itself, the state of the labour market is the best barometer of our economic trends.  The good economic news is that unemployment in 2018 should be below 6% and expected to fall further to below 5.5% in 2019.   Fair Weather The real measure of success of any government economic policy is how it helps sustain private sector job creation.  There is no better way of giving people an opportunity for a better quality of life, while at the same time containing the social welfare burden on the state.  So if the jobs barometer is pointing towards Fair Weather why are we being so prudent?  Paschal Donohoe is clearly concerned about the cumulative effects of EU pressure, the increasingly real threat of a disruptive Brexit and the deteriorating trading relationship  between the EU and the US, the latter most clearly evidenced by trans-Atlantic posturing on tariffs.  Then there are domestic political constraints he has to contend with.  The current government is still bound by the confidence and supply agreement with Fianna Fáil, which means that the budget will have to be some form of collaborative effort.  It is now reasonable to question the extent to which government policy is actually driving the recovery.  This particular minority government isn't achieving very much.  It's a crude measure of government productivity, but the number of acts passed in the Oireachtas is in decline.  In 2015, which was the last full year where a majority government was in power, there were 74 acts added to the Irish Statute Book.  In 2017, the first full year of a minority government, there were just 44.  In the year to date, there have been only 9.   Less Auspicious While the employment statistics are good, some of the other economic markers are less auspicious.  The one currently receiving the most attention is the corporation tax yield, where there are concerns that it is too high to be relied upon.  The influence of foreign direct investment on our economy has been so prevalent in recent years that we have introduced a hybrid measure known as GNI* alongside the traditional measure of the size of the economy, gross domestic product or GDP.  GNI* may well be a more appropriate way of measuring the size of the economy.  It excludes some of the consequences of the relocation of foreign owned assets, notably intellectual property, in assessing the overall size of the economy.  However, because corporation tax yields are skewed by the presence of intellectual property, GNI* might not be the best yardstick to measure the impact of corporation tax receipts on the Exchequer returns. The focus on the high level by international standards of corporation tax in the composition of our tax yield masks another outlier.  We have one of the lowest levels of income tax relative to economic size within the OECD.  That apparently does not attract the same level of concern, possibly because income taxpayers vote whereas corporation taxpayers don't.  Conflicting Evidence Despite all this conflicting evidence, the SES offers comforting reassurance that the economy continues to grow and the taxes continue to roll in.  That makes it hard going for people like myself who think that targeted tax incentives are needed to stimulate economic growth and ultimately a sustainable tax yield.  Nevertheless, two of the most problematic areas for government – housing and healthcare – have deteriorated over the last decade.  I think both have suffered from the elimination of tax allowances and hence the willingness of individuals to contribute more, directly or indirectly, to their provision.   Tax relief for medical expenses and medical insurance was effectively halved.  In housing, mortgage interest relief was severely curtailed.  Tax incentives to provide rented residential accommodation were not just eliminated, but where relief had previously been granted, in many cases it was clawed back.  It would be too much of a coincidence that the elimination of these reliefs have had no bearing at all on the problems in health and housing.  Furthermore, the indigenous business sector needs boosting if we are to reduce our dependency on foreign direct investment.  The low take-up on incentives like the Employment & Investment Incentive, designed to offer funding alternatives for small and medium enterprise, suggests a real need for reform.  Indigenous firms are only mentioned in the SES in a discussion on productivity because they are falling behind.  Next week, the government will conduct its annual National Economic Dialogue.  Various civil society groups will be invited to share their views with Ministers on economic issues from taxation to environment to pensions and much else in between.  The SES will doubtless inform the discussions, but it will also constrain the agenda.   The over-arching message of the SES is that we have an economy which is not broken so it is not going to be fixed.  Forget about any missed opportunities for doing even better.  With so many internal, external and political constraints it has never been easier to be prudent. Brian Keegan is Director of Public Policy and Tax at Chartered Accountants Ireland

Jun 26, 2018
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