This year's Budget reverted to type, with the focus on personal tax bands and credits, though no action on the "old reliables". Businesses are interested in these changes because of the impact of the "tax wedge", and the trade-off of pay restraint for tax reform in successive agreements between the social partners, writes Colm Kelly.
Businesses are perhaps even more interested in changes in the various administrative provisions under which they are obliged to collect tax on behalf of the Government, e.g. VAT, PAYE etc.
But it's only occasionally that the taxation of corporate profits is on the agenda. Last year was a very welcome exception to this, with changes to Ireland's holding company regime and the introduction of tax credits for research and development expenditure. For technical reasons, the implementation of these measures was delayed - the holding company legislation was not finally approved until September - so it's a little early to see activity from this change coming through.
However, there was a related measure announced this year - the reduction in the rate of capital duty from 1 per cent to 0.5 per cent. Capital duty is a tax that adversely impacts on Ireland's position as a holding company location, and therefore on its competitiveness for regional and international headquarters operations. Reducing the rate to 0.5 per cent still leaves Ireland at a competitive disadvantage compared with locations such as the UK, which has no capital duty. Investors who are sensitive to this tax will therefore either have to plan around it or invest elsewhere. The main beneficiaries of the change will be Irish companies raising equity finance.
Meanwhile, Ireland Inc will continue to promote itself as a holding company location, emphasising the many other fiscal benefits that can be availed of here, such as R&D tax credits, access to a significant double tax treaty network, and a corporate tax rate of 12.5 per cent.
The general 12.5 per cent tax rate on corporate profits has also been the subject of some debate. Business and employee groups have taken opposite lines on this. ICTU argued that the rate should be increased. IBEC will be pleased that the Minister restated the Government's commitment to the 12.5 per cent rate. In our experience, foreign investors want to do business in Ireland for a variety of reasons, and they will compare competing jurisdictions. The 12.5 per cent tax rate is a key piece of the jigsaw.
The competition for foreign direct investment is increasingly competitive. While Ireland scores relatively well on some criteria (e.g. skilled workforce), it does relatively poorly on others (e.g. geographical location). A significant increase in the tax rate would result in a significant drop in the country's overall attractiveness as a location in which to establish high-value jobs.
Ireland cannot afford to be complacent in this regard. There is an increasing trend for cost-sensitive employment to move East - whether to the new members of the EU, with their own relatively low corporate tax rates, or even as far as India. Ireland needs to replace these jobs with high-skilled employment. Competing jurisdictions are also found in Western Europe, including the UK, with lower cost bases but higher tax rates. Switzerland has emerged as a formidable competitor, with aggressive marketing of its fiscal incentives, which do not need to comply with EU rules.
Interestingly, Minister Micheal Martin stated in an interview last week that the bottom line is competitiveness, and that the 12.5 per cent rate might even be lowered if it became uncompetitive.
Recent press coverage has referred to an amount of €200 million to be raised from Revenue investigations. This relates mainly to the investment by individuals of "hot money" in otherwise legitimate investments. Over recent years, Revenue powers to obtain information from businesses about their dealings with third parties have increased substantially and these new powers are beginning to be exercised. Many "innocent" businesses - particularly in the financial sector - are going to be caught up in the process of providing information, and they will need to tread carefully to make sure they are fully aware of their rights and obligations and the penalties for failure to comply.
Of course, businesses and financial institutions have obligations under other legislation concerning their dealings with clients. In recent times, there has been increasing sensitivity to the whole area of money laundering and the risk that the proceeds of tax evasion may be passing through financial institutions. We understand that the level of reporting to Revenue under anti-money laundering legislation has grown rapidly.
Recent company law and regulatory changes have also increased businesses' obligations in this area. Not only must they be "aware" of their obligations, but they must have documented a procedure for ensuring they comply with their obligations: the Directors must confirm that such a procedure exists, and the auditors must report on its effectiveness.
Finally, there has been a lot of press coverage of unacceptable use of tax reliefs. The Minister has announced a review of tax incentive reliefs to ensure there is an appropriate balance between the equity of the tax system and the economic benefits of such reliefs. The specific examples mentioned by the Minister have already been subject to restrictions. So the impact of any changes will perhaps fall more heavily on some of the income exemption schemes, i.e. bloodstock, artists and woodlands.
So this Budget will receive a cautious welcome from business. The restated commitment to the 12.5 per cent rate is most welcome. The reduction of duty will be a help for those it affects but more may have to be done to give a full solution to inward investors.
Colm Kelly, is head of Tax and Legal Services, PricewaterhouseCoopers
