The Programme for Government suggests necessary tax changes with no easy solutions

Tom Maguire | Business Post Column

The general election was in early February and a Programme for Government was agreed on June 15th which has yet to be approved. But just look at the social, humanitarian and economic global crisis that happened between those dates. The Programme, a substantial document seeking reform while admitting it won’t be easy with no easy solutions, was written accordingly. There’s a lot on tax.

The document explains that there should be greater clarity on the likely economic impact of the COVID-19 emergency by Budget 2021. The government would then set out a medium-term roadmap detailing how we will reduce the deficit and return to a broadly balanced budget. The Programme says the government will use tax and expenditure measures to close the deficit and fund public services if required. It would focus any tax rises on behaviours with negative externalities such as carbon tax, sugar tax, plastics, etc.

The Programme explains that the government is committed to a pro-enterprise policy framework by providing a stable and sustainable regulatory and tax environment. Part of its “July jobs initiative” comprises enacting legislation for tax warehousing. This was a unique concept (rightly, in my view) in that it was brought about on the understanding that we would write the law later. 

Warehousing puts certain tax liabilities on ice interest-free for twelve months (interest of around 10 per cent would otherwise apply). If those taxes aren’t paid when they exit cryostasis then interest at 3 per cent per year applies. Good call; right now taxpayers need to focus on everything but tax. The July initiative also suggests consideration of measures that “may be needed to support the hospitality, retail, entertainment, arts and leisure sectors”. How about reduced VAT rates?

The Programme wants to review the tax environment for SMEs and entrepreneurs so that Ireland remains an attractive place to sustain existing businesses or start up new ones. I’ve previously suggested in these pages a tax credit for business uncertainty along the lines of our R&D regime. We could modify it to include relief for resolving business (as opposed to technical) uncertainty where the business reinvents its operating model: I called it the “Abnormal Business Credit” (ABC) which could provide a tax credit on the new source of taxable income arising from adapting the old model for, say, the first three years.

We’ve done something similar with the start-up exemption for companies; ABC broadens its application. Business uncertainty necessitated a new business model with related taxable income without which the old model mightn’t survive to pay future PAYE and other taxes. We could include counter measures against abuse but it’s probably fair to say that people adapting their business to manage the current uncertainty won’t be doing it for a tax credit.

The Programme explains that the government would review Capital Gains Tax in each Budget over the next five-years with the particular objective of supporting innovation driven enterprises that will help us transition to a low carbon economy. I’ve mentioned the reduction of CGT rate previously in this column.

Our focus has to be getting people to spend but others must be encouraged to sell. Michael McDowell SC kindly wrote a foreword to my Capital Gains Tax (CGT) book and explained 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”. That should form part of this review given a need for post-lockdown consumer activity.

The programme requires that a Commission on Welfare and Taxation be established to independently consider how best the tax system can support economic activity while ensuring sufficient resources exist to meet the costs of the public services in the medium and longer term.

The Programme continues that this Commission will review all existing tax measures and expenditures and have regard to tax practices in other similarly sized open economies in the OECD. That’s a lot of necessary work. Something similar transpired in 2009. Since then we’ve seen the OECD’s Base Erosion Profit Shifting (BEPS) initiative; that brought about significant change to our law and it isn’t done yet.

Late last year I wrote that the EU Commission sent us (and Austria) reasoned opinions “asking” for the interest limitation rule in the EU's Anti-Tax Avoidance Directive (ATAD) to be brought in. Under the ATAD, deductions for “exceeding borrowing costs” (basically, interest expense less interest income) are limited to 30 per cent of a company’s earnings before interest, tax, depreciation and amortisation (EBITDA).

The ATAD explains that member states may allow standalone entities (i.e. those not in a corporate group) to fully deduct borrowing costs. Additionally, member states may allow taxpayers to deduct excess borrowing costs up to a €3 million threshold. The more exceptions that can be brought about here, the better.

Bottom line, some corporate groups could see their tax deduction for interest on debt reduced. This makes borrowing more costly right at the very time when it shouldn’t be. The ATAD allows for a 2024 implementation deadline where certain Ts & Cs are met. We were relying on that before we got the Commission’s letter disagreeing with our proposed 2024 “go-live” date. So could we split the difference and go with 2022? This law should be high on the Commission’s review list.

Setting up such a Commission is something I’ve been going on about in this column for some time. My version suggested legislative drafters be centrally involved so that legislation could be written side by side with the Commission’s proposals and so would be ready to green light. I think that’s still the way to go given it’s likely that tax changes may be required during the Commission’s term.

Other issues outlined in the Programme include bringing new homes, currently exempt from Local Property Tax, into the tax system. The Programme wants to examine the merits of changing tax arrangements to encourage more people to work remotely given we’re learning how to keep the business lights on while many stay at home.

Finally and on a personal note, the Programme says that as the country begins to reawaken it “will have a National Day of Commemoration to commemorate those we have lost, to celebrate all those who helped us survive and endure” March 26th was the day we saw the Dáil and this entire nation stop everything to applaud frontline healthcare workers. We watched as Eileen Dunne finished her RTE news bulletin summing up succinctly how we all felt: “Ladies and gentlemen, we salute you.” Just a thought.

Please note this article first featured in the Business Post on 21 June 2020 and was re-published kindly with their permission on our website.

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