"Made in Brussels" - it's not too far off the mark to envisage this stamp on the relatively few sections of the Budget statement which referred directly to the taxation of business.
The budgetary impact on this sector was in substance determined in July 1998 when the Government agreed with the EU a plan for phasing out the low 10 per cent tax rate. The deal reached at that time included measures to reduce the general rate of corporation tax to 12 per cent by the year 2003, which were embodied in legislation in the 1999 Finance Act. Consequently, the mainstream corporate tax rate falls from the current 28 per cent to 24 per cent with effect from January 1st, 2000.
The Minister's innovations this time relate to small business. For several years, a lower rate of corporation tax has applied to the trading income of small companies. A welcome development for this sector is that, with effect from January 1st, the lower trading rate will be 12 per cent. Unfortunately this will apply to profits up to a level of £50,000 only, as opposed to the profits of £100,000 which have attracted the lower rate in the current year. A form of marginal relief will apply.
The 1999 Finance Act provided for the introduction of a 25 per cent rate of tax on the passive income of companies, also to take effect from January 1st. This rate will be slightly higher than the mainstream rate applicable to active trading income, 24 per cent and will actually be double the 12 per cent rate which will apply to the trading income of small to medium size companies.
It may be expected that in the years to come the courts will be required to interest themselves to an increasing extent in determining the difference between active and passive income.
In his December 1998 Budget statement, Mr McCreevy mentioned an intention to examine further measures aimed at clawing back some of the advantages afforded to the corporate sector through the reducing tax rate regime. Evidently the examination has not been concluded because no measures have been announced in the Budget.
Presumably then the corporate sector will have to continue holding its breath until it sees the Finance Bill for next year.
Although not specifically directed at the business sector, there are some other initiatives mentioned elsewhere in the Minister's statement which will be positively welcomed by corporate Ireland. One is the proposal to reduce the capital gains tax rate on sales of all development land to 20 per cent and to apply this rate also to sales of residential land which are dealt with as part of the trading income of a developer. This should provide a boost to increasing the stock of land for housing.
The cost threshold by reference to which capital allowances and the running expenses of cars are computed is being increased from £16,000 to £16,500 and this will be of help to business.
Also in line with the reduction in the standard rate of income tax from 24 per cent to 22 per cent, this lower rate will apply to withholding tax on professional fees and to deposit interest retention tax. As against this, the ceiling below which the employers' full rate PRSI contribution is payable increases from £35,000 to £36,600 from April 6th next. This will result in an additional cost of approximately £192 per annum of employing somebody whose pay falls within this particular range.
The proposals in this Budget statement have opened up a significant gap between the top personal tax rate, even after the reduction to 44 per cent, and the 12 per cent rate which will apply to the profits of smaller corporates. This must provide a significant incentive for sole traders and partnerships to incorporate.
It will be interesting to see therefore whether Mr McCreevy will, at some later date, bring forward a surcharge on the undistributed income of closely held companies, as he indicated previously that he might do.
Finally, it is interesting that despite the falling tax rates which have been a feature of recent years, the tax take from the corporate sector has continued to increase. Corporation tax receipts for the year 1998 were some 21 per cent up on the previous year and in a year to year comparison up to the end of October 1999 the increase was even higher at 29 per cent.
In his statement, Mr McCreevy mentioned how the capital gains take had almost trebled between 1997 and 1999, despite the halving of the nominal rate over that period from 40 per cent to 20 per cent. Evidently he might have made much the same case in relation to the corporation tax initiatives which have been introduced over the same period.
Enda Faughnan is head of tax at PricewaterhouseCoopers in Ireland