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Irish Budget Review

By Editorial
December 18, 2012

Announcing the government's Budget for 2013, Finance Minister Michael Noonan declared that, just two years after the catastrophic near-collapse of the country's banking system and its subsequent bail-out, Ireland is now "well on the road to recovery" and can look to the future with "confidence." However, he gave taxpayers little to cheer about despite the government having so far met its obligations under the bail-out agreement.

Introduction - the Fiscal and Economic Background

Opening his Budget speech on December 5, Noonan outlined his priorities: "We will continue to fulfil the conditions of the bailout programme, we will carefully plan full market return, we will build on the strong sectors of the economy and repair the weak sectors until they are strong again, we will grow the economy and create the jobs for which so many out of work and so many young people yearn."

The government's projections indicate that the general government deficit will stand at 8.2%, within the required 8.6% target set under the bailout. A deficit of 7.5% is expected in 2013, falling to 5.1% the following year and 2.9% in 2015. These estimates are based on anticipated gross domestic product (GDP) growth of 1.5% in 2013, 2% in 2014 and 2.9% in 2015.

The government needs to make savings and generate revenue increases to the tune of EUR3.5bn in 2013 to achieve its deficit target. It will also need to further consolidate its budgetary position by EUR3.1bn in 2014 and EUR2bn in 2015.

To date, Ireland has fulfilled 160 of the separate conditions set under its bailout programme, and has now drawn down over 80% of the money made available. Noonan is keen that Ireland returns to the international financial markets at sustainable interest rates. However, while some progress has been made, Noonan said that the government must be certain of the market access it needs. The result is a "work in progress."

Key Measure - the Local Property Tax

One of the more controversial aspects of the Budget is likely to be Noonan's introduction of a property tax, to which it is committed under the terms of its European Union (EU)/International Monetary Fund (IMF) bailout programme.

The government introduced an interim household charge of EUR100 (USD131) in January this year, causing immediate controversy which led to protest marches and calls for a boycott from members of parliament. Noonan will however press on with the scheme, announcing that collection of a Local Property Tax (LPT) will commence on July 1, 2013.

The LPT will be charged at 0.18% of the market value of properties worth up to EUR1m, and at 0.25% on any excess value over EUR1m. The 0.18% rate is fixed for the lifetime of the current government, but a "local decision factor," allowing local authorities to vary the rate by up to 15%, will apply from 2015.

The household charge will cease to operate with effect from January 1, 2013, and a half-year LPT will be payable next year. The Finance Department anticipates a EUR250m revenue boost from the measure in 2013, with a full year figure of EUR500m. The levy will be administered by the Revenue Commissioners.

The levy will not be universal in its application, however. Noonan said in his Budget speech that the residential market is showing signs of increased activity, and, in order to maintain momentum, he will provide an exemption from the LPT to the end of 2016 for any new or previously unoccupied homes bought in that period. The exemption will also apply to purchases of any homes in 2013 by first time buyers and to residences in unfinished estates. Further, any property purchased between now and the end of 2013 will be relieved from capital gains tax if held for at least seven years.

Business Taxation

The most important announcement from Noonan with regard to business taxation was that corporate income will continue to be taxed at 12.5%.

With Ireland now meeting fiscal targets set out in the bail-out agreement with the 'troika,' pressure  to increase corporate tax to strengthen the government's revenue base looks to have receded.

Last year, the newly-elected government had to fight hard to retain Ireland's highly attractive rate of corporate tax as European finance ministers began to insist upon a tax hike in return for lowered interest rates on the bailout loans keeping its economy afloat.

It remains to be seen whether Ireland will be able to resist growing momentum within the EU for greater tax harmonization, of which a common consolidated corporate tax base will, if approved at EU level, be the first major step. Brussels has insisted, however, that corporate tax rate harmonization does not in any case form a part of this process.

Nevertheless, Noonan affirmed that the government "remains 100% committed" to maintaining the current rate, and made clear that: "Even though this commitment has been stated numerous times, it is worth repeating so that there can be no doubt."

Also featuring prominently in the Budget was a series of measures targeted at Ireland's small and medium sized enterprises (SMEs). Finance Department figures show that SMEs make up over 99% of businesses in Ireland and account for almost 70% of total employment. The Department believes that domestic demand is crucial to sustaining and generating employment in Ireland, indicating that the government's recovery strategy "needs to give some additional support to small businesses."

A large part of the Budget is therefore dedicated to what Noonan terms a Ten Point Tax Reform Plan, designed to "make a real difference to SMEs" by giving the sector a helping hand. The Plan has five major aims: to help the cash flow position of SMEs; aid such businesses in accessing funding; reduce the costs associated with the administrative burden of tax compliance; boost demand for SME products in new markets, and provide incentives to create new jobs.

The Plan includes the following measures:

  • Reforming the 3 Year Corporation Tax Relief for Start Up Companies to allow unused credits to be carried forward. 
  • The cash receipts basis threshold for value-added tax (VAT) will be increased from EUR1m to EUR1.25m, and the Close Company Surcharge de minimis level will rise to EUR2,000. These measures are designed to boost cash flow for SMEs;
  • The Foreign Earnings Deduction for work related travel will be extended to certain countries beyond the BRICS, to bolster exports.
  • Amending the R&D tax credit by doubling the initial spend eligible for the credit from EUR100,000 to EUR200,000 to encourage innovation and business expansion.
  • The "carried interest" provision in the tax code will be reviewed, and the Finance Department, together with the Revenue, will launch a consultation on the taxation of micro enterprises.

Personal Taxation

No changes were announced by Noonan with regard to personal income tax, with the finance minister observing that Ireland already has the most progressive income tax system in the EU.

"The government is firmly committed to this progressive system as it illustrates the fairness of our tax code," Noonan said. "This level of progressivity in the tax system and the record levels of Foreign Direct Investment show that we are striking the right balance between our income tax levels and incentivising investment and job creation in Ireland.  The more jobs that are created, the wider our tax base will be for the provision of public services."

As the government had already closed or restricted a number of tax reliefs benefiting mostly wealthy taxpayers in previous budgets, Noonan felt that there was no need to extract more revenue from personal incomes.

"I see greater fairness of the tax system as reducing the number and amount of reliefs that can be availed of by income earners to shelter their income from taxman," he said. "Already, the ability of certain wealthy people to reduce their income tax liability to very low levels through judicious use of tax incentives has been restricted.  The introduction of the high earners restriction has been successful in generating additional tax revenue."

However, with the government striving to ensure "fairness" in the tax system, Noonan announced a number of measures in the area of capital taxes "to ensure that people with wealth make a fair contribution to the State." As a result, the threshold at which Capital Acquisitions Tax applies was reduced by 10% and the tax rate increased from 30% to 33%. In addition, Deposit Interest Retention Tax and Capital Gains Tax were both increased by 3% to 33%, with all these measures effective from midnight on the day that the Budget was announced.

Noonan also announced that from July 1, 2013, Maternity Benefit will be treated as taxable income, although it will continue to be exempt from the Universal Social Charge. "This measure will correct an anomaly so that women on maternity benefit will pay the same level of income tax as when they are working," Noonan explained.

Additionally, further changes were proposed for the pay-related social insurance (PRSI) system.

According to Noonan, "PRSI contributions are progressive and redistributive because people at the higher end of the income distribution generally get back less than they pay in." The reforms are therefore designed to ensure the stability of the Social Insurance Fund and to broaden the income base for PRSI.

The minimum annual contribution from the self-employed will go up from EUR253 to EUR500 and the weekly allowance for employees will be abolished. Where modified PRSI ratepayers have income from a trade or profession, such income and any unearned income they have will be made subject to PRSI with effect from January 1, 2013. From 2014, unearned income from all other taxpayers will become subject to PRSI.

Pensions also come under the microscope in the Budget. According to Noonan, while the government "wants to encourage those on lower and middle incomes to save for pensions, it will not allow pensions of the scale previously allowed to be accumulated at the expense of taxpayers whose actual earnings are, in many cases, a fraction of those large pensions."

The Budget therefore aims at clarifying the government's position on a number of key issues. While the tax relief on pension contributions will continue at the marginal rate of tax, the much maligned pension levy announced last year will not be renewed after 2014. Likewise, from January 1, 2014, the tax relief on pension contributions will only serve to subsidize pension schemes that deliver income of up to EUR60,000.

Further, "Top Slicing" relief will no longer be available from January 1, 2013, on ex-gratia lump sums in respect of termination and severance payments where the non-statutory payment is EUR200,000 or over. This will replace the current system whereby an individual's average tax rate for the previous three years applies to such lump sums.

Other Measures

One other measure of note announced by Noonan was his decision to extend the film tax relief scheme, otherwise known as Section 481 relief until 2020. This follows an impact study of the relief by the Department of Finance, and in light of these findings, Noonan announced reform to the operation of the scheme, by moving to a tax credit model in 2016. This, the Finance Minister said, would "ensure better value for taxpayers' money and eliminate the need for high income investors to provide the funding for the scheme." The scheme will also be enhanced to make Ireland a more attractive location for foreign film and television productions, he disclosed, without adding more detail.

In addition, Noonan announced that the 9.9% second reduced rate of value-added tax for tourism-related services will remain in place in 2013.

Noonan also revealed that Ireland will agree a new Inter-Governmental Agreement with the United States in relation to the US Foreign Account Tax Compliance Act, commonly known as FATCA.  According to Noonan, reaching such an early agreement with the United States "will be of benefit to Irish business."


As can be expected, the American Chamber of Commerce Ireland welcomed the government's commitment to maintaining Ireland's competitive tax regime in the 2013 Budget, believing that it "sends an important message to the international investment community."

"Minister Noonan opened his budget speech pointing to the importance of FDI investment in Ireland and highlighting the 8,400 new jobs announced by IDA backed companies so far this year," said AmCham Ireland in response to the Budget. "This is a fantastic achievement by Ireland Inc and reinforces the need to maintain a pro-business environment for continued FDI investment. The Minister stated that retaining Ireland's competitiveness for mobile investment remains a central plank of the Government's export led recovery strategy for Ireland. In achieving this, it is important that Ireland remains an attractive location for mobile talent and we are pleased that the Minister has not sought to increase the cost of employing skilled talent, helping to ensure Ireland can continue to compete for inward investment."

AMCham Ireland even welcomed the government's decision to sign a FATCA agreement with the US government: "That Ireland is one of the first countries in the world to agree a new Inter-Governmental Agreement with the United States in relation to the US Foreign Account Tax Compliance Act is evidence of international standing of our progressive taxation regime and policies."

Although expected for many months, the Local Property Tax was unsurprisingly the most controversial measure in an otherwise "steady as she goes" budget. And while Ireland has committed to the LPT as part of its bail-out agreement, it is the way that tax is to be applied that is garnering the most criticism.

Noonan defended the levy in his speech, and said of the Local Property Tax that it is "fair and progressive as all property owners make a contribution but those who own the most valuable properties will pay the most." However, Brian Keegan, Director of Taxation, Chartered Accountants Ireland for example observed that: "A valuation basis will hit people in urban areas harder. Ironically it is more equitable to have no minimum valuation below which the tax does not apply, as this helps ensure that the urban/rural divide is not as pronounced as it was for the old Residential Property Tax."

Keegan was also critical of the Noonan's measures targeted towards helping small businesses and start-ups, which he suggested will achieve very little.

"The sector of our economy struggling the most is the indigenous SME sector providing goods, services and employment within the domestic economy," he observed. "At the Minister's own admission, the individual tax relief measures proposed for the sector are modest.  It would have been better to introduce one or two significant tax reliefs, rather than make minor modifications to existing reliefs which are not very successful.  For example, the take-up on the three year Corporation Tax Relief for start-ups is very low because the qualifying conditions are so restrictive.  Merely extending its term won't make much of a difference."


The fact that the Irish economy is growing at all given the bleak economic outlook across the EU has surprised many - not least the Irish themselves when they look back to the scale of the crisis confronting them two years ago. This is not to say, however, that the transition hasn't been painful. Individual taxpayers have carried much of the burden of higher taxation, and the debt crisis undoubtedly shook the faith of many investors in the Irish economy and the government's policies. Nevertheless, it can also only be a good thing that Ireland is meeting the targets set under the bail-out agreement, and, given this straight jacket, Noonan was never going to have much room in this budget to bestow tax gifts on individuals and business in time for Christmas. But taxpayers and investors value fiscal and economic stability as much as tax cuts. So, in this context, it was probably a decision by Noonan to do nothing - i.e. leave corporate tax on hold at 12.5% - that was his most effective measure (or non-measure) as far as corporate investors were concerned.


Tags: tax | Ireland | business | investment | Finance | budget | United States | interest | services | pensions | small business | Compliance | International Monetary Fund (IMF) | tax compliance | European Union (EU) | banking | insurance | property tax | tax incentives | environment | gross domestic product (GDP)



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