The IMF sees property and tax as potential threats
It doesn’t seem that long since I wrote about the IMF coming to Ireland in this column but sacre bleu that was a year ago! They’ve been again and recently published their report. They welcomed Ireland’s continued strong economic growth which they say lead to a rapid reduction in unemployment and strengthened public and private balance sheets. But they continued “While the outlook remains positive, lingering crisis legacies, rising housing prices, and external downside risks mainly from resurgent global protectionism, adverse effects from Brexit, and ongoing changes in the international tax landscape—pose challenges”. So not quite the future’s so bright I have to wear shades.
With me it’s all about the tax. In last year’s column, I referred to the “BUE threats” mentioned by the IMF being Brexit, US tax and EU tax law changes and all are still with us. For example, this year their report estimates that the U.S. Corporate Income Tax rate cut plus investment expensing might reduce corporation tax revenue by approximately 0.25% of GDP. The IMF also says that US tax reform could make Stateside more attractive for future investment but that US MNEs are “unlikely to repatriate existing IP on a significant scale”. Further, it notes that in the medium-term, the implementation of reforms related to the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, including the EU Anti-Tax Avoidance Directive (ATAD), should lead to a better alignment between reported profits and the location of productive factors. This could also lead to “increased real investment to take advantage of Ireland’s favourable business climate, including its relatively low statutory corporate tax rate”. Not too shabby.
But one of the key areas the IMF’s report focused on was housing. It regards the risk of a sharp correction in housing prices as low in the medium term. Critically it notes that as in the run-up to the crisis, the ongoing strong economic momentum is accompanied by a surge in house prices and rents. But unlike in the pre-crisis period, house prices are fuelled by a persistent supply shortfall rather than by bank credit. So this time is different? Of course, the report encourages our authorities to boost efforts to expand the housing supply and improve affordability. They considered that tax could be used more actively to reduce land and property hoarding, and that improving housing affordability measures should be well targeted.
So tax is a tool to deal with the problem. The IMF outlines others but I’ll stay with tax. Tools include nutcrackers and sledgehammers and the latter give wrong answers in the wrong circumstances so in my view, tread carefully. According to the IMF, commentators and pretty much everyone really, priority should be given to encourage greater housing supply. The IMF, with an eye to reducing land hoarding, said a vacant site levy will be introduced starting in 2019 citing rates of 3% for the first year and 7% for the second and subsequent years and that it should be “reviewed“ (I presume that’s another word for “increased”) periodically to ensure effectiveness. On vacant houses, and to ensure their greater utilisation, the report suggests a surcharge on properties that are left vacant in urban areas. But these are “stick” measures, so what’s up, what about a “carrot” Doc?
When discussing enacted measures to improve housing affordability the IMF looked at the “help to buy” scheme. They highlighted that there is scope “to re-calibrate the Help-to-Buy scheme, which provides a tax rebate of up to 5 percent of the dwelling purchase price for FTBs (first-time buyers), towards low-income households”. Who knew the IMF reads the Sunday Independent? You’ll recall that in April I mentioned a recent Appeal Commissioners decision which dealt with a taxpayer who purchased her home in 2016 for €279,000. She drew down a mortgage on the property of €195,000 and had it been €195,300 she would have qualified for the Help-to-Buy relief. Was that €300 difference a proportionate legislative response? You know my thoughts.
That €300 over the mortgage term would fit within the IMF’s maxim of scope to re-calibrate the Help-to-Buy scheme towards low-income households. Don’t get me wrong the amendments should go way beyond €300 over a mortgage term as I don’t think that was the limit of the IMF’s recommendation!
In addition to extending this relief there are other available “carrot” measures which I’ve previously written about in this column because I just can’t get away from the IMF’s line that subdued construction has resulted in severe housing shortages, fuelling price hikes and stretching affordability.
So, for example, VAT on new homes is a substantial upfront cost for both homebuyers and potential investors. “Help to Buy” helps first-time buyers with this VAT cost. Potential landlords don’t get this so why not bring about an income tax credit for the VAT paid on the acquisition of a property or incurred on properties constructed with a view to rental?
Similarly, an exemption from capital gains tax was introduced back in 2012 for properties acquired between December 2011 and December 2014 where such properties were held for a period of seven years. Why not bring about an income tax exemption on rents for a similar term on properties which are rented out for the first time? Another suggestion to entice investors staying in the rental market would be to have a form of "roll-over relief" whereby a capital gain on the disposal of an investment property could be deferred once the proceeds are invested in a similar property.
Some will say that these benefit those who have funds available to make such investments, and that may be but as I’ve previously mentioned in this column, Myron Scholes, Nobel Prize winning economist, wrote that success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in them. If tax-efficient investment increased the supply of property, is that not the definition of success?
Here’s the thing, corporate tax policy is one tool in attracting investment, a totally necessary one. The IMF said that BEPS and EU law changes should lead to a better alignment between reported profits and the location of productive factors. If that investment and productive factors locate here then roofs over heads are necessary. Corporate and income tax are symbiotic that way. There’s a haunting line in Kevin Costner’s “Field of Dreams” (1989) “If you build it they will come”, what if when they come it’s not built, what then?
Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 15 July 2018.