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Income tax is a fixable factor in the war for talent
The soundtrack to Jackie Chan’s movie “Rush Hour” includes Edwin Starr’s “War, what is it good for, absolutely nothing, say it again…” Granted Starr was singing about a very different conflict. Right now there is a war for talent and in business few things speak louder than money. Culture may eat strategy for breakfast but talent ensures that there’s a strategy hungry culture in the first place. No talent, no nothing.
We need to be able to compete for talent and tax is a protagonist in this economic war and there will be winners and losers. We need to make sure we are the former when enticing businesses here.
This was recognised by the European Commission’s July economic brief on personal income tax for Ireland where it spoke, among other things, about the future of the Universal Social Charge (USC). The paper refers to the USC as a “purposeful, but unloved tax”. I’ve been working in tax for a long time and I’ve yet to see a “loved tax” unless the word “refund” is attached but I don’t think that’s what the EU commission was getting at!
It’s now understood that USC may morph into PRSI so we may see different types of tax payable on income shrink but unless the effective rate decreases then it’s a case of so what? Bottom line is cash in employees’ hands and that’s where the marginal rate (or the highest rate payable by the person on their income) matters.
The EU brief notes that “single earners in Ireland face among the highest marginal tax rates in the EU. …, a very high marginal tax rate in Ireland is reached at a relatively low point in the income distribution. While marginal tax rates for couples at the average wage (with or without children) remain below the EU21-OECD average, they sharply increase with income”. So it’s official, we have a rate problem. And it’s one that the Government has said it will look at.
But why not add to this? Why not try to change how people are remunerated as well as taxed so as to reduce employers’ costs while increasing employee benefits.
Share based remuneration has long proven to be an effective tool for rewarding employees and a new share SME scheme was referenced in last year’s budget which would be subject to State Aid approval. Such regime can incentivise employees as the performance of their company impacts their return and the value of any shares they hold. I mention this because of Sweden’s very recent (June) and good State Aid story; good because the EU gave the green light for its proposed tax effective share based remuneration regime saying that it wasn’t an unacceptable State Aid.
The response from the EU authorities said that the Swedish "Employee share tax regime" is designed to enable “young and small companies” to recruit and retain the key employees they need to achieve their growth potential. It continues that such companies often do not have enough capital or financial resources to offer/pay a market wage, which makes it difficult for them to attract and retain key talented or skilled personnel that is crucial for the company to develop innovative ideas and expand their businesses.
Currently an employee who is granted a share option is deemed to receive a taxable benefit at the time the option is exercised. Our law operates similarly and this up-front tax charge must be self-funded by the employee and can act as a disincentive if he or she doesn’t have the cash flow at that time.
The newly approved Swedish system ensures that the employee will be taxed at a later point in time, being the sale of the shares, i.e. exercising a share option is not considered taxable remuneration. When selling the shares, the employee will be taxed at a lower tax rate on the difference between the income realised from the sale of shares and the total price paid for them at the exercise date. The employer will not have to pay any social security contributions on the value of this benefit.
Indeed, the UK has a similar regime in its Enterprise Management Incentive which is designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed albeit higher limits apply. There’s a common theme here! The incentive applies to companies that have fewer than 250 employees and gross assets not exceeding Stg£30 million.
Coming back home and as noted earlier the former Minister for Finance indicated his intention as part of last year’s budget to develop a new, SME-focussed share-based incentive scheme to be introduced in Budget 2018. This intention was referenced in the Government’s recent Summer Economic Statement by the current Minister so game faces people!
In the past certain aspects of our law looking at tax implications for SME’s referenced companies employing fewer than 250 persons with an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million. This would appear an appropriate template although it would of course be preferable if it could be extended to larger companies.
Daryl Hanberry, tax partner, and I responded to the Government’s consultation on share based remuneration around this time last year. We noted that the tax treatment of share awards imposed an immediate charge on the employees when the shares are vested or the options are exercised. One of our recommendations was that any tax due on share awards should be deferred until the shares have been disposed of or for a fixed period of time. This mechanism isn’t a million miles from what the Swedes suggested to the EU in their State Aid application in December 2016.
Budget 2018 is fast approaching. Right now we are in harm’s way in the war for talent, business and investment. In such a war, unlike that mentioned by Starr, there are winners and losers and we need to be the former.
It’s timely that I’m writing this piece in July because to paraphrase Bill Pullman in the original July 4 movie from the nineties: Will Budget 2018 be the one where “we declare in one voice, we will not go quietly into the night, We will not vanish without a fight, we’re gonna live on…” to change how we tax and remunerate work and reap the benefits for all?
Tom Maguire is a tax partner in Deloitte and current author of Irish Income Tax (formerly ‘Judge’) His monthly columns on tax matters appear in the Sunday Independent. The above article was first published on 30 July 2017.