The Irish Government's four-year-plan
Ernst & Young's reaction The Government’s much anticipated four-year National Recovery Plan (the “Plan”) has been announced with some austere implications for the country’s citizens. It will take a few days to see how the market responds. As the market can deal with problems but can't deal with uncertainty, it is important that the Budget is passed. It’s fair to say that future Budgets will be delivering some tough medicine. A less far-reaching plan would more than likely have been insufficient to convince international markets and the IMF that Ireland could honour its commitments. However, the Government did well not to accede to the reported pressure from Europe to increase the country’s corporation tax from 12.5%.
The broadening of the tax base will affect disposable income, consumer spending and ultimately, the standard of living for the majority of individual taxpayers. However, the reality whereby 45% of income earners pay no income tax is simply unsustainable. It is worth noting that measures as severe as these would have been implemented in any event, with or without IMF intervention.
The Government's outlook is relatively positive considering the amount of money it is taking out of the economy. It will mean the exporting sector will need to perform spectacularly well for this recovery plan to be reached. In light of the scale of this further fiscal retrenchment, the Ernst & Young Economic Eye Forecast will be lower than the official projections despite continued optimism over Ireland's extremely strong export sector.
Eurozone Economic impact – Marie Diron – Economic Advisor – Ernst & Young
The possible consequences of the Irish crisis for the Eurozone range from significant but manageable to outright disastrous. The outcome will depend on policy decisions in Ireland, by the EU and the ECB and on financial markets' assessment of them. In a best case scenario, Ireland's crisis is dealt with swiftly and efficiently. Markets are convinced by the restructuring plan proposed, in particular as regards the banking sector. Governments in other fragile economies, at this stage primarily Portugal and Spain, show in a credible and clear way that they control the path of public finances and are on track to achieve significant restructuring.
At the current juncture, there is a significant risk that this scenario does not come to pass. In particular, Portugal has yet to show that the measures taken to curb the deficit are indeed bringing public finances on a sustainable path, while Spain has yet to implement significant restructuring of its banking sector. In this context, there is a danger that the Irish crisis cascades into crises in the other peripheral economies. If markets were to loose confidence in policymakers' ability to redress the situation, debt restructuring would probably be unavoidable. Can this be achieved in an orderly fashion? Possibly, but that requires a step change in policy action that goes from day-to-day management of erupting crises to coming up with a long-term plan that can cater for and prevent future crises.
One possible approach would be a Brady Bond style scheme in which peripheral government debt would be swapped for new bonds guaranteed by the Eurozone as a whole. To work well, such a scheme would almost certainly have to include some mix of maturity extensions, reduced interest rates and writedowns of principal, which would mean large investor losses and some global financial contagion. But if such a scheme were quickly and effectively implemented it might at least bring rapid closure to the problem. In this process, the European Central Bank would need to help a smooth restructuring process by keeping unlimited liquidity offers and intervening in strained markets where required. Without swift and forward-looking action from EU governments and the ECB, debt restructuring would likely lead to turmoil in financial markets that would engulf other economies and eventually the Eurozone as a whole.
Business Tax – Kevin McLoughlin – Head of Tax Services Ernst & Young
"Companies will welcome the Plan's strong endorsement of the 12.5% rate of Corporation Tax as a key cornerstone of tax and economic strategy. There has been much uncertainty in recent weeks about the longevity of the rate, so this endorsement within the terms of the Plan should help reduce those concerns. The recognition of the role that research and development ('R&D'), and intellectual property generally, play in the creation and maintenance of employment is important, as it underlines the importance of retaining our R&D tax credit and Intangible Assets regimes. This will send out a clear statement that Ireland, despite its economic difficulties, is still very committed on incentivising the creation and maintenance of high value jobs. These incentives are key for Ireland to foster a culture of innovation within Irish businesses, and to allow us to compete for what is an increasingly mobile part of international investment."
Business will welcome some of the other proposals which are key to continued competitiveness such as the reduction in the minimum wage, possible reduction in business rates, and reduction in bureaucracy.
The Business Expansion Scheme was under utilised as a means of funding growing businesses, despite the tightening in availability of credit. The specifics behind the proposed Business Investments Targeting Employment scheme will be eagerly awaited to see if it is something which business can embrace in order to secure ongoing funding.
Pension – John Heffernan – Tax partner – Ernst & Young
“Surprising the Plan provides for the removal of an exemption from PRSI and health levy on pension contributions, this brings the tax treatment of employees in line with the self employed who were unfairly treated in this regards."
"The phasing out of tax relief on pension contributions from 41% to 20% over 4 years is a retrograde step and will lead to a scenario whereby individuals will cease to make contribution in 2014 and beyond, why would you make a contribution which costs you a net 80% only to be in a position whereby you could conceivably be exposed to tax rates of circa 50% when you draw down your pension."
"Pension tax relief incentivises people to risk locking away their money for up to 40 years. There is no parole for good fund behaviour or early release for family emergencies. The reduction in tax relief might well make people reluctant to do the time."
“The Government seems to recognise that there is a risk that reduced tax relief will make people less inclined to make pension provision. According to the report there is a total of €2.5bn of tax relief currently ‘in the system’ when deductibility of pension contributions, lack of benefit in kind taxation on employer contributions, and the fact that pension funds are not taxed. The estimate of what will be raised through the proposals in the report is €700m, so the Government clearly feels there is still sufficient overall tax incentivisation in place, but has offered to engage with the pension industry to explore alternative means of achieving the same result.”
Inequity for the Self Employed in Pension Proposals – John Heffernan
The proposed restriction in tax relief for personal pension contributions is not matched by any reduction on the BIK exemption for employer contribution . This will widen the tax gap that already exist between corporate pension contributions over self employed individuals. This is a further blow on the already hard pressed self employed business person and will result in a hug fall out in self funded pension schemes, potentially creating an extra burden for the State in future years
The End of AVCs – John Heffernan – Tax Partner – Ernst & Young
“The proposal to limit the tax relief on personal pension contributions ( including AVCs) to 20% by 2014 signal the end of AVCs. Where the tax relief on the AVC contribution will be lower than the tax liability arising on the future pension drawdown, there is no financial incentive to pay AVCs. This will crate a huge difficulty for employees in defined contribution schemes, as they will not be able to plug a deficiency in the employers provided pension y way of making maximum AVCs”.
Indirect Tax - Jarlath O'Keefe Indirect Tax Partner
'The National Recovery Plan announces that standard VAT rate will increase to 22% in 2013 and to 23% in 2014. It is perhaps surprising that the rate not is not being increased with effect from 2011 however an increase,however small, in the current climate may have reduced the level of consumer spending. The plan does however expect to bring in an extra yield of €110 million from and increase in excise duties and licenses in 2011.'
'The Government has also announced that there will be a review of those items which are currently zero rated for VAT purposes. This could result in the unpopular move of VAT being applied to items such as food and children's clothes'
Property tax – Jim Ryan
"Not surprisingly the Plan contains provisions for the introduction of a wide property charge, however to ease the burden of administration, and perhaps give Government time to construct a valuation based charge they have instead opted for a fixed "site value charge" of €100 per residence. No doubt this is the first step on the ladder to a universal valuation based charge.
Incidentally the Plan provides for this charge to increase to €200 by 2014, presumably by circa €30 extra per year."
"There is no provision for a credit for stamp duty paid in recent years against the site charge."
"Its introduction in this form may be no more than the gradual reintroduction of the culture of residential property tax albeit closer in nature to old style rates."
“In addition to the €100 charge the plan has highlighted the introduction of water metering in 2014."
Car Park Levy – Jim Ryan
"It appears this has been shelved and appears to be very little ambition to implement this charge. Given the ease of collection it is questionable as to whether the amount collectable merits it inclusion in the Plan, perhaps we will get clarification on budget day".
Broadening tax base – Jim Ryan
"It is unsustainable to have approximately 45% of our work force outside the tax net, the effect of broadening the tax base, although unpalatable for many, reintroduced a degree of equity into the financing of the State and from next year we will have approx 32% will be within the tax net which is closer to where we were in 2004."
“There is no change to marginal rates of tax with self employed continuing to pay 55% and employees 52% at the top end. However due to a reduction in pension relief we will see high earners hitting this rates on an addition 35,000 of their income.”
PRSI – Jim Ryan
"The replacement of prsi and the various levies with a universal social charge has not materialised in the Plan, however this is expected in the Budget announcement in December."
Stamp Duty – Susan Lynch – Tax Director
" It is disappointing that the speculation about the abolition of stamp duty on residential property did not materialise in the plan as it may have provided some stimulation to a weak residential property market and improved affordabilty for those in the market"
Capital gains Tax – Susan Lynch – Tax Director
"The proposed increase in capital gains tax rates from 2010 may not achieve the projected increase in revenue because historically the capital gains tax revenue has increased when rates are reduced."
