General election manifestos don’t go far enough for business tax

Tom Maguire Sunday Business Post Column

Many parties are focussing on public expenditure rather than tax as part of #GE2020. You can see their point given our many crises but this column’s just about the tax. In their manifesto Fianna Fail suggest setting up a Commission on Taxation (COT) to do, as others would call it, a “deep dive” (I loathe that expression) into Ireland’s tax system. The Greens have suggested something similar with Labour suggesting a “Standing Commission on Taxation” to conduct an “ongoing review of the tax system and of all tax breaks”. Either way let’s call it COT2.0 as only one other such Commission convened this century (COT1.0) back in 2009. There were others but let’s just focus on this century.

The COT2.0 concept got me thinking about COT1.0. Its report was written shortly after the earth fell off its economic axis. Some of its suggestions remain valid today.

On supporting business COT1.0’s view was that the tax system shouldn’t discourage companies investing in their businesses for future growth. Good call. For example, it proposed that corporation tax payable on gains on disposals of assets used for trading purposes should be at the trading tax rate. So where a company, taxable at 12.5%, disposed of a trading asset with a capital gain, the gain would be taxed at 12.5% rather than at the Capital Gains Tax (CGT) rate. Back then that rate was 25%; it’s now 33%, we’ll come back to that.

COT1.0’s suggestion meant that there would be more money available to the company to reinvest (e.g. in other trading assets) or to build up reserves. Some parties have thankfully suggested reviewing the existing “Entrepreneurial relief” which taxes certain shareholder capital gains at 10%. COT1.0’s suggestion would be a welcome addition at the company level.

That brings us to the CGT rate which I’ve grumbled about in these pages. Both the Fianna Fail and Fine Gael manifestos suggest looking at the CGT rate with the former suggesting a move to 25% over the next five years and the latter saying that they would review CGT rates in each Budget over the next five years “with the objective of supporting innovation driven enterprises”.

On dropping the CGT rate to 25%; that manifesto estimates a cost to the Exchequer of €267m. That’s in the same ballpark as that outlined by Minister Paschal Donohoe at last year’s Irish Tax Institute annual dinner where he estimated the annual cost of reducing the rate “assuming no behaviour change” was €36m for each 1% decrease. On that point, I was fortunate to have Michael McDowell SC write a foreword to my book on the subject (is that a deep dive?) last year and he wrote that when the Minister in 2002 “halved the 40% CGT rate and quintupled the yield on CGT, it became very clear that the rate of CGT hugely influenced its yield in a manner quite different from other forms of taxation”. Taxpayer behaviour follows Keynes’ approach: “when the facts change, I change my mind, what do you do sir”. So you can see why a number of political parties are looking to review the CGT rate now; it could free up property and other assets to allow further economic, and thereby, taxable activity.

COT1.0 came about when the OECD’s Base Erosion and Profit Shifting (BEPS) initiative wasn’t born. We’ve seen the legal metamorphosis that’s happened over the past couple of years to deal with BEPS. However, COT1.0 noted that the suggestion that dividends received by an Irish-resident holding company from its foreign subsidiaries should be exempt from tax “featured strongly during [its] consultation process” (the catchy sounding “participation exemption”). Although not proposing it in the end, citing complex rules that we didn’t have back then but do now (thanks to BEPS), the argument ran that a dividend exemption, combined with the then and currently available CGT exemption on disposals of certain shareholdings would be seen as a major part of a competitive holding company regime.

Right now, and back in 2009, the corporate tax treatment of foreign dividends is, and was, complex (understatement of the year). It allows a country to tax foreign dividends with credit for underlying foreign tax. Okay, there’s much more to it. But here’s the thing, “tax with credit” means that the Irish tax arising may not be substantial when one considers Ireland’s low tax rate compared to tax rates elsewhere on planet earth. Seamus Coffey in his review of the Irish corporation tax regime suggested a consultation on moving to a full exemption system. There may be reticence for not going there right now but bottom line simplicity eats complexity for breakfast in terms of investment decisions and should be considered.

When a business calculates its taxable profits it will generally start with the profits in its accounts and make certain tax law adjustments. One such adjustment relates to tax depreciation on certain assets. COT1.0 explained that one tax depreciation problem is that the tax writing-down period (‘tax life’) may not reflect the asset’s actual economic life. By allowing the tax deduction to follow the account’s depreciation figure then issues that may arise in relation to the setting of appropriate time periods are dealt with. COT1.0 explains that the “tools of the trade” in business have changed over the years and will change again and new “tools” will emerge as business develops. It goes on that this is particularly likely for assets related to ‘green’ technology that may develop in the future. Prescient then and even more so now but I’d argue that such a basis should be optional once applied consistently.

And another thing! My last column suggested bringing back the 10 year rule for refunds of overpaid tax that was there for claims made on or before 31 December 2004. If that’s just too far a stretch then why not bring about the 10 year rule for refunds where a taxpayer can demonstrate extenuating circumstances in not making the claim. That’s taxpayer money, not the Exchequer’s so change the law.

While I’m at it! Many parties are looking at extending the Help to Buy scheme or as I’ve called it in these pages the ‘Strict to Buy’ scheme. That’s because a taxpayer had her claim denied because, as the Appeal Commissioner said, had her total “mortgage been €195,300 as opposed to €195,000, she would have qualified” for the relief. The insignificant number smashed the significant condition for the taxpayer. Change the law so that it can do what it was supposed to do.

There’s so many economy benefitting ideas that should be acted upon and not “lost in time, like tears in rain” as Rutger Hauer put it in 1982’s “Blade Runner”. Now’s the time.

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