Press release 2009 - Commission on Taxation recommendations - Ernst & Young - Ireland

Commission on Taxation recommendations to broaden the tax base by stealth

Commission on Taxation recommendations to broaden the tax base by stealth

Ernst & Young welcomes the publication of the report of the Commission on Taxation. The report is a useful addition to the debate on the fitness for purpose of the Irish tax system. The proposals for business are broadly positive though there are some elements which would give rise to concern such as the proposed abolition of the remittance basis. For individuals the overall income tax take is likely to be increased by stealth through the proposed abolition or restriction of a large number of exemptions and reliefs, without necessarily having to increase headline rates.

In its 550 page report the Commission has come up with a package of over 250 recommendations in response to its mandate to:

• consider how the tax system might best support economic activity and employment subject to exchequer considerations,
• consider how the tax system can encourage long-term savings for retirement,
• examine the tax base from the perspective of achieving a balance between taxation of income, capital and spending,
• review tax benefits from a cost/ benefit and social perspective,
• consider options for financing local government, and
• investigate environmental protection measures including the introduction of a carbon tax.

Business taxation
From a business perspective, while the lack of imaginative proposals to enhance Irish international competitiveness is disappointing, there are some helpful recommendations, particularly around double taxation relief on royalty income and simplifying access to withholding tax exemptions. However, the proposals should be seen in the context of the enhancements to corporation tax incentives for research and development and the new relief for intangible assets already introduced in the past year alongside the ongoing commitment to the 12.5% corporation tax rate. The business community will also reflect positively upon the absence of any recommendation to introduce transfer pricing.

Businesses facing falling consumer demand for goods and services will be concerned at the possible competitiveness impact of carbon taxes and the lack of any proposals to reduce the tax costs of employment. Indeed the proposed abolition of the remittance basis of taxation for income tax and capital gains tax could have an adverse impact on inward investment projects that rely on the relocation of key executives to Ireland.

For the SME sector, there is a mixed message. While the Commission supports the retention of tax incentives for film investment and the Business Expansion Scheme, there are proposals to limit the tax reliefs available when passing on family businesses.

Personal taxation
The Commission had a difficult task to perform in that its deliberations were to be performed in the context of Government commitments in the Programme for Government to, in particular, ‘keep the overall tax burden low’ and ‘enhance the rewards of work while increasing the fairness of the tax system’. This predated a current year €19bn exchequer deficit and two tough Budgets targeted primarily at middle income earners. Given that such taxpayers now face marginal PRSI and tax rates of up to 53%, the Commission wisely decided not to recommend the introduction of higher income tax rates.

Instead much of the focus of the report is on the termination of specific tax reliefs that are past their “best before” dates and on broadening the personal tax base.

With the exception of the pension recommendations many of these income tax proposals appear to be less than strategic in nature. A proposed new property tax is likely to prove controversial. While such a tax is being put forward as part of a broadening of the tax base, any such tax would need to be financed out of the same household budget that might already be reeling from the multiple blows of unemployment, salary reductions, pension levies, tax and levy increases, mortgage interest relief reductions, medical insurance stamp duty and excise duty increases. In Ernst & Young’s view the introduction of any new taxes must, as part of any broadening of the tax base, be accompanied by offsetting reductions in personal taxation.

Pension provision
The Commission has proposed that tax relief for pension contributions be given by way of a matching Government contribution of €1 for every €1.60 contributed by a taxpayer. For employees liable to income tax at the marginal rate this is equivalent to reducing the rate at which income tax relief applies to approximately 30%. If implemented, it is unlikely that this suggestion would be sufficient to encourage long-term savings given that the after-tax cost of a pension for many employees would increase by at least 21% at a time of extreme investment market volatility. Members of occupational schemes would suffer a further reduction in take-home pay and those contemplating additional contributions would likely question the attractiveness of providing for pensions that will remain taxable at marginal rates.

Before implementing this proposal the Government will need to seriously consider the concerns of taxpayers regarding the tax efficiency of pension schemes and whether such proposals could trigger the collapse of private pension provision.

Carbon taxation
The Commission has proposed the introduction of a carbon tax on fuels based on the CO2 emission level of the various fuels. While the proposed tax is intended to be revenue neutral, there must be a concern that such a tax will simply be seen as a revenue generator for the Exchequer and that this will simply add to the costs of doing business in Ireland. It remains to be seen what impact such tax would have on consumer behaviour. Other countries have focused on alternative policies to reduce consumption and carbon emissions, for example Germany incentivised property owners to switch to solar power. Alternative measures, such as the recent restructuring of the VRT and motor tax systems to favour low carbon emitting vehicles have had immediate results.

There is no guarantee that any particular recommendations will be implemented either in the short term or at all. Not all of the recommendations in the five reports of the previous Commission on Taxation in the early 1980s were implemented. The challenge will be to resist the temptation to cherry-pick aspects from both reports that are easy to implement but do little to enhance economic competitiveness. Such an a-la-carte approach or frontloading of measures that increase the personal tax burden risks stalling any economic recovery.

Kevin McLoughlin
Head of Tax Services
Ernst & Young

To talk/arrange an interview with Kevin McLoughlin - please contact John Ward, Media Relations Manager, Ernst & Young on 086 780 1398