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Irish Budget Eases Tax On Workers

by Jason Gorringe,, London

12 October 2016

Irish Finance Minister Michael Noonan has delivered a 2017 Budget that focused heavily on reforming the personal income tax system and enhancing the competitiveness of the corporate tax regime.

Noonan's sixth Budget as Finance Minister includes tax reforms to "reduce the burden on taxpayers by just under EUR300m (USD330.6m)." He explained that "these changes consist of about EUR500m of tax cuts that are offset by measures increasing tax revenue worth EUR195m."

As anticipated, Noonan opted to reduce the Universal Social Charge (USC), albeit at a slower pace than that outlined in the Government's election manifesto.

Announcing the measures, he said: "High marginal tax rates act as a brake on employment. They discourage people from taking jobs and discourage emigrants from returning home."

Noonan admitted that he had "limited resources to change the situation," but stated that he would allocate EUR335m to reducing each of the three lower USC rates by 0.5 percent. As a result, these rates will now be 0.5 percent, 2.5 percent, and five percent. The ceiling of the band on which the reduced 2.5 percent rate is payable will be increased from EUR18,668 to EUR18,772.

"Though relatively small, these changes will have a material impact on the disposable income of lower- and middle-income earners – more importantly, it signals the Government's intent to phase out the USC over time as resources permit," he said.

To ensure greater parity between the tax treatment of the self-employed and those in the Pay as You Earn (PAYE) system, Ireland will increase the Earned Income Tax Credit from EUR550 to EUR950. According to Noonan, "this will benefit over 147,000 self-employed individuals generating business activity across the country."

Having previously conducted a public consultation and review of share-based remuneration, Noonan announced his intention to develop a new, SME-focused, share-based incentive scheme, to be introduced in Budget 2018. The Government will need to seek approval for the scheme from the European Commission, and Finance Department officials will begin discussions with the Commission to ensure that the incentive will comply with state aid rules.

Noonan also addressed the issue of Ireland's corporate tax regime, which has come under renewed scrutiny in the wake of the Apple state aid case and the UK's Brexit vote. Noonan stressed that "Ireland's 12.5 percent corporation tax rate will not be changed and nobody is asking for it to be changed." He acknowledged that the UK's exit from the EU "may present opportunities to attract businesses that may move out of the UK or are considering locating there in the coming years," and emphasized that Ireland has "a highly educated workforce and a business friendly environment."

Alongside the Budget, Noonan published an update on the Government's International Tax Strategy. It outlines how the corporate tax regime meets "the highest standards in tax transparency," and restates the Government's commitment to meeting new international tax principles. Noonan has appointed Seamus Coffey, an independent expert, to conduct a review of the corporation tax code, and published the terms of reference for the review.

In addition, Noonan announced his intention to "restrict the opportunity for offshore defaulters to use the voluntary disclosure regime" from May 2017. He will introduce a strict liability criminal offense "to facilitate the prosecution of serious cases of offshore tax evasion." The Revenue Commissioners will be allocated EUR5m to hire 50 new staff and invest in systems and equipment.

The Budget also included plans to:

  • Reduce the 20 percent rate of capital gains tax (CGT) to 10 percent on disposals of qualifying assets up to EUR1m of chargeable gains;
  • Consult on the redesign and modernization of the PAYE system;
  • Introduce a tax on sugar-sweetened drinks from April 2018;
  • Increase the threshold for Category A capital acquisitions tax (applicable to inheritances or gifts from parents to their children) by EUR30,000, to EUR310,000;
  • Reduce the Deposit Interest Retention Tax (DIRT) rate by two percent each year for the next four years, taking the rate to 33 percent in 2020;
  • Retain the reduced nine percent value-added tax (VAT) rate for the tourism industry for a further year;
  • Extend mortgage interest retention relief to 2020;
  • Increase the Home Carers' Credit by EUR100 to EUR1,100;
  • Permit farmers to "step out" of the income averaging system and pay only the tax due on a current year basis, with any deferred tax liability becoming payable over subsequent years;
  • Increase the flat-rate addition for farmers not registered for VAT from 5.2 percent to 5.4 percent from January 1, 2017;
  • Introduce a Help to Buy scheme for first-time buyers, consisting of a rebate of income tax paid over the previous four years, up to a maximum of five percent of the purchase price of a new home, and up to a value of EUR400,000;
  • Extend the Home Renovation Incentive Scheme by two years to the end of 2018;
  • Extend the Vehicle Registration Tax (VRT) relief for hybrid vehicles for two years, and the VRT relief for electric vehicles for five years;
  • Tax natural gas used as a vehicle fuel at the EU minimum rate of excise for eight years;
  • Introduce a carbon tax relief for solid fuels that include a biomass element; and
  • Increase the excise duty on a pack of cigarettes by EUR0.50, with a pro-rata increase on other tobacco products.

The Budget forecast a deficit of 0.9 percent of GDP in 2016, and of 0.4 percent in 2017, with GDP growth of 4.2 percent in 2016 and 3.5 percent in 2017. However, Noonan was quick to highlight the potential impact of the UK's decision to leave the EU, warning that the move "represents a real risk to our economy given the close links and high level of trade between us." To guard against future Brexit-related economic shocks, the Government will establish a "rainy day" fund, by setting aside up to EUR1bn a year.

Reacting to the Budget, business association Ibec said that while the Budget contains a range of positive measures, the scale of the challenge presented by Brexit will demand a series of additional reforms and incentives. CEO Danny McCoy said: "Tax reforms to help level the playing field with the UK are steps in the right direction, but don't go far enough."

McCoy called for a substantial currency crisis package within 60 days and the "re-prioritization of current resources and new spending." He did however welcome the CGT reforms and changes to the taxation of the self-employed, describing them as sensible and "send[ing] out the right message about the need to better support entrepreneurship."

TAGS: individuals | capital gains tax (CGT) | inheritance tax | environment | tax | business | European Commission | value added tax (VAT) | Ireland | interest | entrepreneurs | corporation tax | tax thresholds | excise duty | ministry of finance | offshore | tax rates | carbon tax | social security | tax reform | currency | standards | trade association | trade | individual income tax | Europe

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