Ireland Receives Taxation Commission's Report

by Jason Gorringe, Tax-News.com, London

10 September 2009

The Irish Commission on Taxation’s comprehensive report on the overhaul of the Irish tax system, spanning over 550 pages and with over 230 recommendations, has largely tallied with expectations.

Whilst largely well received, the Commission’s tax proposals have been criticized for disproportionately burdening middle-income families.

As anticipated, the Commission, in its report, recommended the introduction this year of an annual property tax, increases in water charges, and a dedicated carbon tax, as well as calling for the expansion of the PRSI tax base and streamlining of the income tax system.

Although most of the Commission’s proposals are thought to be major contenders for inclusion in Finance Minister Brian Lenihan’s forthcoming December budget, the proposed property tax – arguably the focal point of the report – was ruled out by Lenihan before the report was even presented.

The tax on real estate, which would have brought an additional EUR1-1.2bn annually, was ruled out by Lenihan in the lead-up to the report as being too controversial. However, speaking recently, the Finance Minister did not rule out the levy indefinitely.

According to the Irish Times, he observed in an address in County Wexford, that the introduction of a property tax is ‘inextricably linked’ to the proposed elimination of stamp duty, and that any changes to Irish taxation, including the introduction of a property tax, would have to rationalised in order that it be "fair and equitable".

According to the Commission, Lenihan’s December budget should feature a carbon tax, which would raise revenues of around EUR500m annually and be levied progressively, according to the carbon footprint of each fuel type. This is expected to amount to around 5 cents on a litre of petrol, according to reports.

Another recommendation contained in the Commission’s report was far-reaching reform of the tiers of the existing income tax system.

The PRSI tax base would also be expanded under the Commission’s proposals, and would include making all workers pay PRSI on all sources of income.

The report advocates that increased revenues from the widening of the PRSI tax base should be used to provide tax reductions in other areas, and for the amalgamation of the health levy within the income tax system.

Possibly the most controversial measure within the report was the Commission’s recommendation to begin taxing welfare payments and child benefit.

The report however stressed that any tax on child benefits ‘should be means tested’ in order that the poorest families aren’t unfairly burdened, and noted that impoverished families should not come under its scope.

Unions have slammed these elements of the report, claiming that middle class earners with children, earning around EUR70,000 annually, will be hit the hardest, and estimating that the cumulative impact of the report would be to make middle income families EUR4,000 worse-off annually.

Other key measures recommended by the report included phasing out Ireland’s attractive regime for artists, and removing stamp duty from ATM, credit card and debit card transactions.

Frank Daly, Chairman of the Irish Commission on Taxation, in the foreword of the report, explained that the report seeks to retain Ireland's low-tax structure. Daly noted that the Commission's recommendations do not "advocate an increase in the tax levels, but rather a broader and less volatile base".

“Some of our proposals are radical – an annual tax on residential property, domestic water charges, a carbon tax, and removing or limiting most of the tax breaks that are currently available. We believe that it is not possible to keep things as they are.”

“Our proposals have the general character of making Ireland less vulnerable to economic shocks, encouraging enterprise and innovation, ensuring sustainable water supply and waste treatment, meeting our responsibilities on climate change, supporting the autonomy of local government, encouraging provision for retirement, and improving the fairness of our tax system,” noted Daly.

In a statement delivered on receiving the report on September 7, Brian Lenihan announced that:

“I want to thank the members of the Commission and Chairman Frank Daly for their dedicated work in producing this report. The wide and diverse backgrounds of the membership of the Commission proved invaluable in deliberating on complex issues and greatly enhanced their work.”

“To achieve economic recovery we must address the different challenges that we face: stabilise our public finances, resolve the difficulties in the financial sector, and improve our competitiveness at the same time. This report will play a role in stabilising our public finances and improving our competitiveness.”

“This report’s longer term strategic perspective and its focus on the future will help shape the taxation system for the next decade and beyond. Given that focus, the implementation of the many complex and often inter-related recommendations in the report are likely to be phased in over several years.”

Lenihan added that the government would consider the proposals on the back of commitments that it has made with regard to tax policy in order to maintain Ireland’s international competitiveness.

To this end the minister reassured that the government would: keep the overall tax burden low and implement changes to enhance the rewards of work while enhancing the fairness of the tax system; ensure that Ireland’s regulatory framework remains flexible, proportionate and up to date; introduce measures to further lower carbon emissions and to phase in on a revenue-neutral basis appropriate fiscal measures, including a carbon levy over the lifetime of the government; and, retain the 12.5% rate of corporation tax.

The Commission, formed in February 2008, was drafted in to propose enhancements to “the structure, efficiency and appropriateness of the Irish taxation system”, in such a way as to retain Ireland’s low-tax economy whilst not introducing tax policy that might discourage employment.

Although there was largely consensus on the document’s final draft, it has been reported that Brendan Hayes, Vice-President of union SIPTU, refused to give his signature to the report’s recommendations.

In a letter to Daly, made public, Hayes reportedly underlined his opposition to maintaining a low-tax model in Ireland, expressing his belief that Ireland’s commitment to low taxes prevents infrastructure development, and inhibits economic growth. Hayes also argued that the report was disproportionately punitive on middle-income families.

Whilst the report faced some critical feedback from some unions, and to a lesser degree from political opposition, the Consultative Committee of Accountancy Bodies – Ireland (CCAB-I) welcomed the recommendations, noting that they would encourage both large and small ventures, attract Foreign Direct Investment to Ireland and help Ireland achieve its goal of creating a "knowledge economy".

“Anyone considering establishing a new business would be encouraged by the prospect of a three year tax holiday at start-up, whether they are founding a new company or setting out as a self employed person. Larger companies would welcome greatly simplified rules for paying their taxes and new flexible options to set their investment in research and development against their payroll costs. Better tax rules, combined with targeted incentives, lead to a better business environment and higher Exchequer returns overall,” observed CCAB-I Chairman Tom Fitzpatrick.

The accountancy profession has also pointed to a welcome emphasis in the Commission’s report on simplification.

“There is a significant cost to business in meeting its tax compliance obligations. For that reason, we especially welcome the suggestion that the taxable profit of a company be more closely aligned to the profit per the statutory accounts, thereby eliminating costly adjustments and side calculations,” concluded Fitzpatrick.

The government is to immediately begin discussions on which measures to pursue, taking into account both the recommendations of the Commission on Taxation, cost-cutting panel ‘An Bord Snip Nua’ and an additional report on public sector remuneration, in order to establish fiscal policy for the forthcoming Budget, scheduled for December.

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