Possible New Incentive for Repatriation of Undisclosed Funds
The Minister for Finance was asked to present for discussion by the Government a possible scheme to provide an incentive for those reputedly holding large sums of undisclosed income and assets (and evaded taxes) overseas. Various options which have been mooted by different sources in relation to such an incentive are set out below, and a proposal is outlined which might be regarded as containing those features most likely to combine into an operable scheme.
Having regard to the likely negative implications for aggregate tax revenues over the next few years, to considerations of equity and the integrity of the tax system, and to the advice from the Attorney General's Office that any incentive involving a remission of tax properly due would be open to successful challenge on grounds of unconstitutionality, the Minister feels obliged to recommend against any such scheme.
Instead, he seeks Government approval to issue a statement, in order to dispel the persistent media speculation, which is detrimental to tax-collection, to the effect that, having considered the matter fully, the Government do not intend to introduce such an incentive.
Essence of the "hot money amnesty" proposals
A number of proposals for what has been colloquially called a "hot money amnesty" have featured in recent media speculation. These are all based on the premise that there is a large amount of money in evaded taxes and undeclared income that has been salted away in accounts and assets abroad. It is argued that, given appropriate incentives and guarantees, a proportion of this money could be attracted back "home", and a variety of beneficial effects are suggested, including:
a revenue "take" that would otherwise be unattainable
an improvement in the external reserves
the release of moribund funds for productive use - improved flow of funds through the economy, etc.
The essential components of all these proposals are
i) a charge of the order of 1015 per cent of the amounts repatriated in lieu of the evaded tax thereon, with payment of the charge to cover in full the taxes, interest and penalties due in respect of the repatriated funds
ii) some method of protection against Revenue investigation of past evasion and from queries about future income, probably to the extent of inserting a "buffer agency" between Revenue and participants to preserve the latter's anonymity, and give added insurance against future Revenue investigation.
What form might a basic scheme take?
Prima facie the choice would rest between two basic options:
i) An arrangement involving the simple presentation of an amount of repatriated money to an "agent", who would impose some form of charge (representing a concessionary tax) and would provide a certificate to the effect that this [amount of money] was amnestied.
Two variants of this type of scheme have been mooted:
(a) A scheme whereby the funds could be presented to the agent and, following the deduction of the charge, the applicant would retain the balance (this following the French scheme of 1986); or
(b) the repatriated funds would be lodged in particular Government bonds for a specified period, with the "penalty" devised through some combination of the price of the bond and an interest rate lower than current market rates.
There is little essential difference between these two variants.
(ii) A "tax amnesty" on the lines of that of 1988 (with the extra incentive of a substantial remission of tax liability), specifying relevant year and tax heading and subject to proof of repatriation of the underlying assets.
In the view of the Minister for Finance, option (ii) would be less damaging, for reasons outlined in the answer to question 3 below, were an amnesty to be proceeded with against his strong recommendation.
What rate of fee or tax charge?
Under option (i) it is difficult to see significant funds being attracted if the charge were much more than 10 per cent of the repatriated assets.
For option (ii), this would be couched in terms of a remission of the tax liability: the broad equivalent to charging 10 per cent on the amnestied income would be a four-fifths remission of taxes due.
In either case the levy would represent only a small portion of the total tax evaded on the underlying funds. The degree of tax concession involved would clearly present problems of justification to the compliant taxpayer, especially in the light of well-publicised cases of suspected tax evasion involving offshore funds.
In order to seek to limit opposition from compliant taxpayers, while still retaining sufficient attraction to evaders, a 15 per cent charge could be contemplated in the event of such an amnesty proceeding.
What considerations are relevant to choosing between the options?
If an amnesty were to be proceeded with, the choice would have to rest on the balance, in each case, between the attraction to the "evader" and the risk to ongoing revenue-collection.
The "receipt" arrangement with no questions asked involved in either variant in option (i) essentially provides the evader with "insurance" against subsequent Revenue investigation. It allows him to judge how much he expects Revenue might uncover should they happen to investigate him in respect of any year. By presenting for the amnesty a small multiple of the amount contributed annually, he could be reasonably confident of being able to "block" any investigation of the past.
For example, a tax evader could, if he was reasonably confident that Revenue were unlikely to uncover more than 25 per cent of his cumulative evasion, buy effective protection for income of £0.5 million which had been undeclared over a period of years for as little as £12,500; he could do this by applying for an amnesty in respect of £125,000 and paying £12,500 (at 10 per cent). By so doing, he would have bought himself protection at a cost of a mere 1/20th of his true tax liability (assuming a tax rate of 50 per cent).
This would clearly be very attractive to the evader. However, it would pose an enormous threat to Revenue's efforts because an amnestied sum representing only a small fraction of the amount undisclosed could be used to block any partial discovery by Revenue under any tax head.
This problem would be diminished - but not eliminated - in the second option. Because of the very considerable risks to Revenue's collection efforts, and the likely outcry from the general body of compliant taxpayers against guarantees of immunity and anonymity for what would be perceived to be a privileged few, the Minister considers that only a scheme whereby some form of "return" (sufficient to ensure that the greater part of actual evasion would be put on record) could merit serious consideration.
Online
The Irish Times
The full text of the Memorandum for the Government is available on The Irish Times website at: www.ireland.com