Ireland’s expensive tax cost in doing business

Tom Maguire

The Joint Oireachtas Committee recently published its report on the Cost of Doing Business in Ireland. This looks at a broad range of topics from commercial rates to regulatory compliance to insurance costs to…you get the gist. With me it’s all about the tax.

The Committee looked at the low level of equity funding Irish businesses. Equity’s tax treatment was given as a significant reason for “blocking” its business use i.e. our 33% Capital Gains Tax (CGT) rate is very high and was acknowledged as the fourth highest in the OECD. The Committee didn’t make a recommendation there but as you’ll know I’ve made one in this column many times, reduce the rate. It was 20% back in 1998 having decreased from 40%; when the rate dropped its yield increased substantially.

While we’re at it let’s admit that our CGT code favours the young-er taxpayer. There’s a CGT relief called “retirement relief” which says that when a person, who may have spent time building up their business, disposes of it to a third party then a capital gain arising on that disposal is exempt from CGT where certain Ts & Cs are met.

One of those conditions is that the consideration given for the disposal is €750k or less. Another is that the person be over 55 years of age. Similar disposals to your kids and certain others (let’s just call them ‘the kids’) are completely exempt. However once that taxpayer is over 66 years of age and wants complete exemption then that third party consideration limit drops to €500k and a market value limit of €3m is imposed where the kids are involved. Sure, I get that the policy encourages taxpayers to dispose of their businesses earlier but not everybody wants that.

Deirdre and I saw the latest “Tomb Raider” movie recently (I know!) and Lara wanted to do the whole “Indiana Jones” thing rather than take on her father’s Croft empire. How many kids would rather do their own thing than follow their parents (e.g. Clark Kent as a Smallville farmer, I don’t think so!). That reluctance may require a third party sale for an entrepreneur if looking to exit or they could just stay with the business until they pass to the next world because there’s no CGT on death. Is this the right choice to be imposing? You know my thoughts.

The age limit doesn’t recognise that someone may not be ready or even want to walk away from their business before 66. Of course, we could just remove the age barrier leaving the full relief intact while increasing the monetary limits. If that’s too much to ask in one go (see gradualism discussion below) then why not bring about a “bona fides” test, allowing a taxpayer to hold onto the business beyond 66 years of age and keep the exemption where there was a genuine desire to remain? Techies will know that the expression “…done for bona fide commercial reasons and does not form part of any arrangement the main or one of the main purposes of which is the avoidance of tax” is rampant in our law so why not here?

CGT only comes about when you’re getting rid of your interest in a company (or other assets); what about financing the business while you’re still there? The debt bias didn’t come up in the Committee’s report and that refers to the distinction between a trading tax deduction for interest on debt whereas nothing similar is available for equity finance. Competitors and indeed famous Common Consolidated Corporate Tax Base (CCCTB), to which we have previously said “non merci mes amis”, allow one so let’s bring one in here. As you’ll know I’m not suggesting a CCCTB but rather one tiny element of it here.

Doing all of the above would give (read “not discourage”) taxpayers choices regarding their future involvement in something they have spent time building built up.

But the Committee’s report was about the cost of doing business and the rates of tax on earnings came up for discussion. The €70k ceiling for the imposition of 52% rate of income tax was discussed but without recommendation. Earlier this month Minister Donohue noted that he was struck by the view in relation to the gradual approach being taken regarding tax reform and reduction, “where many would claim that because of the approach being adopted, which is a gradual one, that is a reason for not doing anything at all”. He referred to the alternative being to doing a “…huge amount at once. We’ve been there before. Look how that turned out for us”. Therefore he believed “gradualism, in terms of public expenditure and in terms of tax reform and reduction”, was the way to go.

You can see his point although sometimes ripping off the Band-Aid assists the healing too. However, you have to remember that €2.6 billion out of a Budget 2019 package of €3.4 billion is already pre-committed leaving €800 million for further allocation. But come back to 52% tax on €70k a year because those numbers capture the issue succinctly. If this is way beyond what our competitors offer then is that our competitive disadvantage and a fly doing the backstroke in our rising soup? The gradualism doctrine could remain unoffended if we were to outline how this tax burden could be reduced in the short term thereby bringing some form of certainty to the taxation of individuals. It shouldn’t be forgotten that Finance Act 1999 legislated for our standard Corporate tax rate dropping from 32% in 1998 to 12.5% in 2003. Could that be our “here’s one we did earlier” blueprint for income tax?

The Oireachtas Committee also heard that the introduction of a share-based employee remuneration scheme would enable SMEs to attract and retain skilled employees but made no recommendations. I’ll make one. This should be looked at right now for all companies. It would fall within the gradualism doctrine given that last year’s Finance Act brought us the Key Employee Engagement Programme (KEEP) and the UK is way beyond us in this area.

If gradualism is the future then there’s still much that can be done to make our tax offering more competitive. We got this.

Tom Maguire is a tax partner with Deloitte.

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