The Revenue Commissioners have discovered that a sizeable number of Ireland's top earners, people getting over £250,000 a year, are using substantial income-tax avoidance measures.
The Commissioners have conducted a review of 400 high earners over two financial years, 1993-94 and 199495, and have come to the conclusion that a significant minority are paying little or almost no income tax. While sources insist that most of the top earners paid a significant amount of tax, the Commissioners would not disclose figures.
The review of files arose from a decision to examine the use of tax incentives and the cost of them to the Exchequer. Many of the high earners who have managed to reduce their income-tax liability are lawyers, accountants and businessmen, according to sources in the property business.
A considerable number of them are members of syndicates which have availed of the generous tax shelters in Dublin's International Financial Services Centre. In the past year alone, private investors bought seven buildings in the docklands for a total of £73 million.
Some of these reduced their tax liability by a significant amount by availing of 100 per cent capital allowances on their newly acquired buildings. The investments ranged in value from £3.15 million for 2/3 Exchange Place to £24 million for 5 George's Dock.
Under changes announced in the Budget, private investors in designated areas such as the IFSC will in future only be able to claim up to £25,000 per annum in capital allowances against personal income.
An investor buying a £10 million property in the IFSC has been able to claim 54 per cent (or £5.4 million) in capital allowances against the cost in the first year. This equates to an initial tax saving of £2,592,000 for a taxpayer on the 48 per cent rate.
A further 4 per cent in capital allowances (i.e. £400,000) can be claimed annually over the subsequent 12 1/2 years. This represents an annual tax saving of £192,000.
It is understood that some of the investors have funded their purchases on 100 per cent loans, only committing their tax saving in the first year.
Pension funds, which cannot avail of the tax breaks, have found it increasingly difficult to buy IFSC office blocks over the past two years because of the strong competition from the private sector.
People on top salaries have been in a position to offer higher prices for these buildings because their investments have been subsidised by the taxpayers.
The new restrictions on capital allowances announced in the Budget are expected to end the artificially high values of sites of completed buildings in the planned 12-acre extension to the IFSC. Sites have been selling for between £10 and £11 million an acre.
According to Revenue Commissioners sources, tax incentives are examined periodically and the review in question had "nothing to do" with analysis of the incomes of the top earners as such. It is understood that it was in the course of a scrutiny of the incentives that the extent of the tax avoidance emerged.