COMMENT: Implementation of tax report proposals must not make the country less competitive
THE 550-PAGE report of the Commission on Taxation, which was published yesterday, focuses on a huge range of subjects, and its 230 recommendations have the potential to impact on every taxpayer in the country.
There are recommendations relating to the introduction of a property tax, a carbon tax and a new approach to the funding and structure of personal pensions.
Some of the recommendations which will be of interest to business include a reform of the capital allowance system (with significant risks for certain sectors such as aircraft leasing), and improvements to the research and development credit and the calculation of foreign tax credits.
A number of administrative improvements are recommended. Abolition of stamp duty on share transactions is recommended, which would be a significant positive if it were to survive.
There are a significant number of recommendations on personal taxes and in the PRSI area. PRSI would be extended to share-based payments, the employee PRSI ceiling would be phased out, social welfare payments would be taxable (possibly including child benefit), and the artists’ exemption would be abolished (although the sports persons’ exemption would survive).
A major concern is the recommended abolition of the remittance basis of taxation. This simply does not make sense. We do not have an appropriate regime for attracting senior executives to Ireland as it is. Abolition of the remittance basis will make us even less attractive.
This is an increasingly relevant factor in investment decisions for global businesses, and we are not competitive as it is. Pragmatic steps must be taken to deal with this. It can be done in a focused way, but the alternative approach recommended by the commission is inadequate and ineffective.
Recommendations in the pensions area are significant. Tax relief on personal pension contributions would be replaced by a “matching contribution” of €1 from government for each €1.60 from the individual – equivalent to an effective tax relief rate of 38 per cent.
Tax-free lump sums from a pension fund would be capped at €200,000, with the balance taxable at the standard rate.
An SSIA-type scheme would be introduced to encourage those not covered by pension arrangements to save for retirement. A contribution mechanism is proposed at the rate of €1 for each €2 saved by the individual, with a combined annual total contribution limit of €3,300.
One well-signalled recommendation is for a carbon tax. It applies a flat tax rate to the use of fossil fuels based on emissions. The report estimates that at a carbon price per tonne of €20, the carbon tax would raise to €480 million, a not insignificant sum to be borne by domestic and business users alike. The recommendation would exempt EU Emissions Trading Scheme participants from the carbon tax.
Funding of local government receives consideration, with recommendations to increase water service charges for business, to apply domestic water charges, to seek full recovery of all waste charges and to abolish tax relief on related service charges.
The report covers an enormous range of topics, supported by significant research and analysis. It will be a valuable contribution to the debate about our tax policies, and there are a number of areas which need to be debated.
We must avoid an approach to implementation which increases costs for business, makes us less competitive, and increases the effective tax rates on labour. Such an outcome would be inconsistent with the stated objectives of the commission itself, but at the same time a selective approach to implementation could seriously frustrate those objectives.
Colm Kelly is senior tax partner, PricewaterhouseCoopers
