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Irish Budget Delivers Tax Changes

by Jason Gorringe,, London

07 December 2012

The Irish government will "drive forward" to lead the country out of "despair and despondency" with its 2013 Budget, Finance Minister Michael Noonan has said, announcing a series of new tax initiatives.

Opening his Budget speech on December 5, Noonan outlined his priorities: "We will continue to fulfill 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."

One of the more controversial aspects of the Budget is likely to be Noonan's introduction of property taxation. Ireland is committed under the terms of its European Union (EU)/International Monetary Fund (IMF) bailout to the implementation of a comprehensive property tax regime. 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.

Noonan defended the levy in his speech, and said of the LPT 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." The government will nonetheless take great care to ensure that the measure is diligently implemented. Noonan stressed that the Revenue Commissioners will strictly enforce the LPT and collect any unpaid household charge.

Also featuring prominently in the Budget are 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.

Among the headline measures included in the Plan is the introduction of a three year corporate tax relief for start up companies, which will allow unused credits to be carried forward. The initial spend eligible for the research and development (R&D) tax credit will be expanded from EUR100,000 to EUR200,000, and the Employment and Investment Incentive scheme will be extended down to 2020. 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. The Foreign Earnings Deduction for work related travel will be extended to certain countries beyond the BRICS, to bolster exports. The general rate and Young Trained Farmers rate of stock relief will be extended, and a capital gains tax relief will be introduced for farmers for land restructuring. 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.

Noonan explained, "These measures will make a real difference to SMEs by assisting their cash position and supporting their creation of jobs. I am also publishing a public consultation paper on a micro business tax today." He hopes that while the individual measures are in themselves modest, when combined they will have a significant beneficial impact.

In addition, the pay-related social insurance (PRSI) system will be tweaked. 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.

Finally, a number of more minor tax changes are made in the Budget. The film tax relief scheme will be extended to 2020, but the operation of the scheme will be amended, and the government will move to a tax credit model in 2016. The lower, 9% VAT, rate introduced last year for the tourism industry will remain in place next year, and Maternity Benefit will be treated as taxable income from July 1, 2013. There will be no increases in excise duty on petrol and diesel but the duty on beer, cider and wine will be hiked, as will the price of cigarettes. The rates of both vehicle registration tax (VRT) and motor tax will rise across all categories with effect from January 1, 2013 and carbon tax on solid fuels will be extended on a phased basis over two years, commencing after this winter period. The threshold at which capital acquisitions tax applies will be lowered by 10%, but the rate of both this tax and capital gains tax will be increased by 3% to 33% from midnight on Budget night.

One major thing that will not change is Ireland's low rate of corporation tax. The tax, which stands at 12.5%, has been subject to sustained criticism, with EU politicians at the forefront of the attack. The government has nonetheless stood firm on the rate, a stance reiterated by Noonan. He said that the government "remains 100% committed" to maintaining the rate, and made clear: "Even though this commitment has been stated numerous times, it is worth repeating so that there can be no doubt."

Also sending out a clear message to Ireland's financiers are the latest economic projections, which 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."

Concluding his Budget speech, Noonan said: "When this Budget is implemented, most of the tax consolidation committed to by this government will have been completed and even though the revenue target for 2014 is EUR1.1bn the carry over effect of today’s measures reduces this to about EUR500m or so. In 2015 the carry over effects will reduce the programme target of EUR700m to a similar level. I have set out these likely levels of future revenue consolidation to reassure people and to boost confidence. It will help businesses to plan and invest and it will encourage people to plan their spending. It will allow the markets to assess the sustainability and credibility of our fiscal strategy in the full knowledge that what we undertake to do, gets done. We are now well on the road to recovery so let’s look to the future with confidence."

TAGS: tax | small business | economics | business | pensions | value added tax (VAT) | Ireland | property tax | tax incentives | fiscal policy | gross domestic product (GDP) | employees | budget | corporation tax | excise duty | ministry of finance | small and medium-sized enterprises (SME) | tax rates | carbon tax | micro business | tax reform | research and development

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