Noonan Delivers Tax Changes In Irish Budget

by Jason Gorringe, Tax-News.com, London

08 December 2011

Irish Finance Minister Michael Noonan has delivered a comprehensive austerity budget comprised largely of tax measures designed to raise almost EUR2bn (USD2.7bn) in additional revenue.

Following on from Public Expenditure Minister Brendan Howlin's announcements on December 5, Noonan delivered the budget's tax related measures on December 6. The government is aiming, in line with its commitments to the European Union (EU) and the International Monetary Fund (IMF), to slash public spending in 2012 by EUR2.2bn and secure EUR1.6bn in extra tax receipts. As Noonan put it: "The task of this government is to regain control over Ireland’s fiscal and economic policies, to grow the economy again and to get people back to work".

He argued that, in this endeavour, the government has made a strong start. Noonan stressed that political stability has been restored, and that many of the conditions of the EU/IMF Programme have been successfully renegotiated, contributing to the restoration of Ireland’s reputation abroad. He noted that a gradual economic recovery has begun to take hold, with the Department of Finance forecasting an a 2.5% increase in nominal GDP next year, with growth driven by the exporting sector.

Turning to the tax measures both included and absent in Budget 2012, Noonan made clear that the government will not bow to any pressure to raise Ireland's 12.5% corporate tax rate. He said: "The government have successfully protected this rate even under international pressure and given our fiscal state...I want to say to our friends in the multinational sector who continue to invest so strongly in Ireland and Europe, there will be no change in Ireland’s 12.5% corporate tax rate. We promised this in the Programme for Government and we will fulfil this commitment."

Also pledged in the coalition's Programme for Government was that there would be no increase in income tax. As such, income tax rates, bands and credits remain unchanged. Noonan said: "I want to make clear that there will be no increase in income taxes in this Budget – no increases in rates, no narrowing of bands and no reductions in personal tax credits. Wages and salaries in January will be no less than wages and salaries in December, so people will continue to have discretion on how they spend their income."

The fact remains, however, that in spite of these promises, the government is also committed to GBP1.6bn in tax hikes. Noonan said that, in carefully considering the options available, the government had concluded that direct taxes, such as income tax, have a bigger impact on jobs than indirect taxes. Consequently, the bulk of the Budget's tax related measures relate to value-added tax (VAT) and capital taxes.

Responding to his critics, who attacked the plans after a draft of the Budget was leaked last month, Noonan said there were few alternatives. "Are they suggesting that income tax should be increased or that we should welch on our commitment that the 12.5% corporate tax rate is sacrosanct? If they are, we fundamentally disagree with them," he said.

Consequently, the VAT rise, included in the leaked document, will go ahead. The previous government had agreed with the EU and the IMF to increase VAT by 2% in two stages: 1% in 2013 and 1% in 2014. The coalition is now bringing these increases forward to 2012, taking the rate to 23%. However, it has pledged that the rate will not be increased beyond 23% during the life of the government. The 9% reduced rate introduced in the Jobs Initiative for certain tourism related services, along with the 13.5% rate applicable to home heating oil, residential housing, general repairs and maintenance, will remain the same.

The other key tax measures unveiled by Noonan were as follows:

• The corporate tax exemption for new start-up companies will be extended for the next three years, and will be available for companies that commence trading in 2012, 2013 and 2014.
• The stamp duty rate for commercial property transfers will be reduced from the current top rate of 6% to a flat rate of 2% on all amounts in respect of all non-residential property, including farmland, commercial and industrial buildings. The change took immediate effect from December 7.
• A capital gains tax incentive was introduced for property purchased between December 7, 2011 and the end of 2013. Properties bought during this period and held for at least seven years will see the gain attributable to that holding period relieved from capital gains tax. However, capital gains tax will rise from 25% to 30% from from December 7.
• From January 1, 2012, the exemption level of the universal social charge (USC) - introduced in Budget 2011 - will be raised from EUR4,004 to EUR10,036. This should benefit nearly 330,000 people and is designed to assist people in moving into the labour market. From next year, the Revenue Commissioners will collect the USC on a cumulative basis, reducing the risks of the over- or under-payment of the USC.
• The current rate of capital acquisitions tax is to increase from 25% to 30% from December 7.
• Deposit Interest Retention tax will be increased from 27% to 30%.
• The Pay Related Social Insurance (PRSI) base will be broadened through the removal of the remaining 50% employer PRSI relief on employee pensions. The base will be further broadened to cover rental, investment and other forms of income from 2013.
• The rate of notional distribution on the highest value Approved Retirement Funds (ARFs) and similar products will be increased to 6%, and the rate of tax on the transfer of an ARF on the death to a child over 21 will rise from 20% to 30%.
• The “citizenship” condition for payment of the Domicile Levy will be abolished, so as to ensure that “tax exiles” cannot avoid it by renouncing their citizenship. Noonan said he intends to keep the issue of the tax treatment of tax exiles under constant review.
• The Carbon Tax on fossil fuels introduced in Budget 2010 will be increased from the equivalent of EUR15 per tonne to EUR20 from December 7. Farmers will be allowed a double income tax deduction for increased costs arising from the change in carbon tax.
• In early 2012, the government will consult with the motor industry and other interested parties to review options for the improvement in vehicle registration tax and motor tax revenues in future years. In the meantime, effective January 1, 2012, the motor tax will rise, generating additional income of EUR47m in 2012.

Concluding his statement, Noonan said that the government will not repeat the mistakes of the past, and will meet its international commitments, and urged that the Budget "balances the need to restore confidence in Ireland's fiscal position with the key objective of supporting economic growth that delivers jobs."

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