With £1.4 billion to work with, the business community will be disappointed that apart from some clarification on the proposed 12.5 per cent tax rate, Mr McCreevy's second Budget is marked by deferral of decisions on many issues. Decisions on the tax treatment of Irish-registered non-resident companies, the extension of the rural renewal scheme, tax relief for child care and renewed film incentives are among those that must wait for another day.
Confirmation of the phased introduction of a standard 12.5 per cent corporate tax rate post-2003 is welcome. Business will be relieved that the Minister has finally confirmed annual 4 per cent reductions in the rate from January 1st, 1999, and that EU approval for the 12.5 per cent rate to apply has been received. While these reductions were signalled last July, doubts have been emerging in recent weeks because of the wording of the July statement and because of a push to harmonise direct taxes across Europe. At 28 per cent, our corporate tax rate from next January will be the joint lowest in the EU along with those of Finland and Sweden.
The Minister has also confirmed a 25 per cent corporate tax rate for non-trading income post-January 1st, 2000. He proposes that deposit interest, interest on Government securities, royalties and rental income will be taxed in corporate hands at 25 per cent, as will profits from dealing in and developing land (as opposed to construction profits) and profits from the exploitation of oil, gas and mineral resources. Otherwise profits should qualify for the 12.5 per cent rate. The introduction of withholding taxes on dividends from April 6th next was targeted as a revenue-raising measure to compensate the Exchequer for the perceived reduction in the Corporation Tax yield. Although exemption will be available to certain shareholders who are tax-resident in other EU countries or in countries with which we have a tax treaty, the imposition of withholding taxes reduces our attractiveness to overseas investors and inevitably increases the cost of equity for Irish business.
It has the potential to divert investment elsewhere and to frustrate certain business transactions for no just reason. The Minister also signalled an intent to recoup some corporation tax by introducing a surcharge on certain undistributed trading income of closely held companies. If introduced at present surcharge rates of 20 per cent, it could severely inhibit the ability of family and entrepreneur-owned companies to reinvest and grow. Any such tax should be limited only to profits that are not reinvested in the business.
The income tax measures, together with proposals to take the provision by employers of bus and rail passes and creche and child care facilities outside the BIK net, offers some respite in an ever-tightening labour market.
The proposal to introduce a Save As You Earn (SAYE) share scheme is also positive. Employee ownership secures the commitment of employees to competitiveness and aligns the objectives and prosperity of employees with that of their employer companies. SAYE schemes are likely to comprise the extension of share options to all eligible employees possible at a discount to the market value of the employer's shares. Employees will in turn be obliged to save a specified amount on a regular basis to purchase the shares eventually and will not be liable to pay income tax on the gain made on the exercise.
It is disappointing that the Budget statement contained no update on the Minister's discussions with the EU regarding the precise tax incentives that might be available in designated areas. With the £25,000 annual cap on capital allowances and anti-unitisation provision remaining unchanged, there is now real concern that the package of incentives in many designated areas will be insufficient to stimulate investment. The Minister's lack of action on these points is a serious setback for the proposed National Conference Centre, the Docklands generally and for the redevelopment of O'Connell Street and its environs.
The extension of deadlines for various designated areas is however welcome. In particular the extension of the general urban renewal deadline (to April 30th, 1999) and the seaside resort scheme deadline (to December 31st, 1999) will enable several worthwhile projects to be completed.
David Kennedy is a tax partner in KPMG.