Irish budget too reliant on uncertain sources, EU Commission warns

The majority of revenue-raising measures introduced in Budget 2018 are "biased towards uncertain tax bases" and could undermine future Government revenue, the European Commission has warned.

In its winter reports on member-state budget programmes, the commission also warned that the State’s corporate tax rules were still being used in aggressive tax planning structures by multinationals and that a significant portion of inward investment could not be explained by “real economic activities”.

The reports, which are part of the commission’s post-crash monitoring and assessment procedures, said the Republic was experiencing sustained and strong economic growth, which provided “ample momentum” to further increase the resilience of the public and private sectors here.

However, it pinpointed the Government’s increased reliance on transaction-based taxes as a key risk factor.

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In particular, it highlighted the recent increase in the stamp duty rate on commercial property transactions from 2 per cent to 6 per cent, which was widely criticised by the domestic industry.

“ In the recent past, these have proved to be an unstable and highly pro-cyclical source of government revenue,” it said.

The commission also noted that Government revenue from corporation tax, as a proportion of total taxation, continued to rise, but as a tax base it was “ highly concentrated and prone to volatility”.

Almost 40 per cent of corporation tax revenue here comes from just 10 large multinationals.

Broadening the tax base could help improve revenue stability in the face of economic fluctuations, the commission said.

In its report, Brussels also took aim at the Republic over tax avoidance by multinationals.

Aggressive tax planning

While Ireland had taken some steps to clampdown on aggressive tax planning, it was clear the high levels of inward and outward was out-of-kilter with economic activity on the ground.

“ The high level of dividend payments and, in particular, charges for using intellectual property, suggest that the country’s tax rules are used by companies that engage in aggressive tax planning ,” it said.

Exemptions from withholding taxes on dividend payments made by companies based in Ireland may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction, it said, noting this may facilitate aggressive tax planning.

The paper also noted that some provisions in bilateral tax treaties between Ireland and other countries may be used by companies to circumvent new tax residency rules.

Overall, it said the Ireland’s economy continued to grow robustly with real gross domestic product (GDP) rising by 7.4 per cent year-on-year in the first three quarters of last year, well above the euro area average.

It also noted that the labour market remains strong, with unemployment falling to 6.7 per cent last year, down from nearly 16 per cent at the height of the financial crisis.

However, it said the Irish economy faced many uncertainties, including Brexit. Ireland’s geographical position and levels of trade with the UK make it the most vulnerable member state to an adverse outcome from the talks, the commission said.

Addressing emerging infrastructure bottlenecks would be essential for sustainable and balanced growth in the future, it advised, noting the Government’s new Project Ireland 2040 plan proposed a series of measures to address such issues. The commission did not , however, pass judgement on the plan.

Housing supply

The paper found that the State had “repeatedly intervened to tackle the under-supply of housing”, but acknowledged that it would take time for the measures to have an effect.

“Against the backdrop of a limited housing stock, residential property price growth accelerated,” it said.

“Years of low investment following the economic bust are taking their toll on the availability of supporting infrastructure for residential sector construction (such as water and transport), constraining housing supply,” it added, observing that while prices did not seem overvalued in 2016, affordability had become an issue.