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Tuesday Newspaper Review - Irish Business News and International Stories - - April 30, 2013
By Finfacts Team
Apr 30, 2013 - 9:48 AM

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The Irish Independent reports that the Irish pay less tax than anyone else in western Europe, with the tax rate on company profits among the lowest of all member states, new figures show.

And despite the recession, the figure is lower than what it was in 2000.

In the Eurozone, only Slovakia has a lower tax-take than Ireland, according to the European Commission.

Latest data for 2011 shows that Ireland's tax-to-GDP ratio was 28.9pc, compared with France at 43.9pc, Belgium at 44.1pc and the UK at 36.1pc.

The share of social contributions in Ireland such as PRSI is the second lowest in the EU, with income tax and indirect taxes such as VAT making up the bulk of the total tax revenue in 2011.

This is markedly different from the typical structure of the EU, where each item contributes roughly a third to total revenue, the commission said.

The social security fund – used to fund welfare payments – gets 16.4pc of tax revenue, compared with the average of 37.3pc across the 27 European countries. The vast majority of tax here goes straight to central government.

Seamus Coffey, economics lecturer at University College Cork, said Ireland's low level of social contributions drags it down the rankings.

"It's down to social contributions more than tax. Our PRSI contributions are much, much lower than the EU average. On tax, we're close enough to the average. But social contributions pulls us right down," he said.

Mr Coffey said the introduction of the property tax would have little impact on the figures.

In addition, 15 countries have a higher top rate of tax than us. But the commission does not say when the top rate kicks in in each country. For a single person in Ireland, tax is levied at 20pc of income up to €32,800 and at 41pc thereafter.

GDP is also skewed in Ireland because of the impact of so many multinationals basing their European operations here. Revenue at those companies is reported as part of Ireland's economy, but ultimately makes its way elsewhere.

Findings

Key findings from the data include:

• The total tax-to-GDP ratio in Ireland is the sixth lowest in the European Union – at 28.9pc in 2011 – and the second lowest in the euro area. In 2000, the figure was 31.3pc.

• Direct and indirect taxation make up 43.4pc and 39.4pc of the total revenue respectively.

• VAT accounts for the biggest share of tax receipts, at 54.1pc – broadly in line with other European states with the average at 53.3pc.

• Ireland has the third lowest corporate tax rate in Europe at 12.5pc, with Bulgaria and Cyprus the lowest at 10pc each.

The Irish Independent also reports that one of the country's leading stockbrokers has warned Ireland's international image is being threatened by the risk of public sector unrest.

Goodbody said the Government continues to use a "carrot-and-stick" approach with unions despite the fact Croke Park II was thrown out.

And it warned that the Government could collapse unless a solution is found.

"Ireland's tag of 'poster child of austerity' is being put under threat by these disagreements," Goodbody chief economist Dermot O'Leary said.

The Government suffered a major blow after Siptu, one of the country's largest trade unions, rejected the successor to the Croke Park Agreement earlier this month, leaving the Coalition facing an industrial relations battle with 290,000 civil and public servants amid attempts to claw back an extra €1bn up to 2015.

Investors

But Goodbody said that international investors do not appear too spooked, with the markets showing little evidence of change.

"Despite this, markets don't appear to be too concerned, with the Irish 10-year trading at a yield of 3.65pc, still well below the 4.15pc that the new bond was issued at in March," Mr O'Leary said.

"Given the possible political consequences in particular, it would be unwise to ignore the risks around this issue."

The warning comes just days after it was revealed public sector unions will be asked if they are willing to negotiate a deal aimed at cutting €300m from the pay and pensions bill this year.

The Government has asked the Labour Relations Commission to meet with the unions after they overwhelmingly rejected the Croke Park successor.

Despite the rejection, the targets of cutting pay and pensions by €300m this year and €1bn by 2015 remain. The Dail sub-committee on Public Expenditure and Reform last week criticised the Government for factoring in the €300m worth of savings into this year's estimates without stating where they would come from.

Agreement

Goodbody said the Government continues to insist that if agreement to slash the public sector pay bill cannot be reached, it will press ahead with pay cuts, the freezing of increments or compulsory redundancies.

"This is obviously something that the Government will want to avoid; some unions have already warned of industrial action in the event of pay reductions, while the political cost of failure to agree on the savings could be terminal for the Government," Mr O'Leary warned.

"For that reason, it will do all it can to broker a deal before the deadline of July 1."

The Irish Times reports that hundreds of small and medium-sized Irish companies will get access to cheaper loans following the European Investment Bank’s decision to make €200 million available to SMEs here through AIB.

Companies with up to 3,000 employees will be able to apply to AIB for funding of up to €300,000 at a rate of 5.25 per cent. This represents a discount of 1.25 per cent to AIB’s usual standard variable rate for SMEs.

This latest funding announcement follows two tranches totalling €250 million in recent years from the EIB for Irish small businesses via AIB. “The drawdown has been 100 per cent and that alone is protecting thousands of jobs in the SME community in Ireland,” AIB chief executive David Duffy said yesterday.
Mr Duffy said there was evidence some sectors were beginning to turn, outside of agriculture, multinationals and foreign direct investment in recent years. He said the EIB funding was “critical” to copperfasten that turnaround for various sectors, including hotels, which he said were experiencing an increase in activity.

EIB president Werner Hoyer said this was the bank’s largest scheme for SMEs in Ireland and the first to include “broad eligibility” for mid-cap companies here. It is its 11th lending programme with AIB since 1990.

Strong support

Mr Hoyer said the new funding demonstrated its “strong engagement” to supporting small and mid-cap businesses in Ireland. He had no concerns about the money being repaid to the EIB. Mr Hoyer said the EIB had “strong confidence” in Ireland’s ability to exit its bailout programme and return to global financial markets.

The EIB is a not-for-profit organisation that provides loans across the European Union’s 27 member states at low interest rates. In 2012, the EIB provided €13 billion to more than 200,000 firms across Europe. It provided nearly €505 million in long-term, low-cost loans to Ireland last year for investment in projects, including at Trinity College Dublin and UCD, and in renewable energy and waste.

Yesterday, Minister for Transport Leo Varadkar announced his department was in discussions with the EIB for loans to fund the Luas cross-city tramline and major road projects.

Mark Fielding, chief executive of the Irish Small and Medium Enterprises Association, welcomed the funding, albeit with a caveat. “We assume that the original figure committed to by AIB of €4 billion will be increased by this EIB amount and will be loaned as new and additional funds as distinct from recapitalisation and replacement of overdrafts with term loans, as has been the practice heretofore.”

Mr Duffy confirmed yesterday the EIB funding would form part of its €4 billion lending figure to SMEs this year.

Richard Bruton, the Minister for Jobs, Enterprise and Innovation, also welcomed the EIB’s announcement, saying it was important to put a range of “funding instruments” in place for Irish businesses. Separately, Mr Duffy said AIB would meet the Government’s direction to reduce its total payroll expenses by 6 to 10 per cent on foot of a report from consultants Mercer earlier this year.

AIB, Bank of Ireland and Permanent TSB are expected to submit their plans to the Department of Finance in the next fortnight. Mr Duffy declined to comment on whether this would include him taking a pay cut saying it would not be “discreet” to announce this before writing to Minister for Finance Michael Noonan.

Salary cut

Mr Duffy noted he had taken a 15 per cent cut to the salary he agreed on taking the job. He said that he would prefer the next set of capital stress tests to coincide with reviews next year by the European Banking Authority rather than ones planned here this year.

In addition, Mr Duffy said AIB’s plan to reduce its cost base by €350 million, or more than 20 per cent, was “deliverable” within the context of the overall AIB group. He said the recent increase in the bank’s standard variable mortgage rate was “regrettable” but reflected the cost of funding the institution is having to bear.

The Irish Times also reports that failed spreadbetting business Worldspreads has sued accountancy firm Ernst and Young (E&Y) over allegedly negligent auditing services.

WorldSpreads Ltd (WSL) claims it could not continue to trade after a shortfall, which may exceed £22 million (€26 million) was allowed to grow over a number of years in its client account balances. The shortfall meant it was unable to comply with UK Financial Service Authority (FSA) regulations and that led to its board putting the company into special administration in March last year, it said.

E&Y was negligent in carrying out its services and obligations to WSL in connection with audits between 2007 and 2011, it is claimed. The case was transferred yesterday to the Commercial Court by Mr Justice Peter Kelly on consent between the parties.

WSL is registered in the UK and is a wholly-owned subsidiary of WorldSpreads Plc, registered in Ireland. It was an online financial markets trading business. Its principal activity was the provision of spread betting services, including on foreign exchange, futures and options. Ernst & Young, Harcourt Centre in Dublin, acted as its auditors since 2007 and was engaged to carry out audits under the FSA’s supervision rules, it is claimed.

In 2008 and 2009, as a result of reports into WSL’s activities by the FSA, a number of issues of concern about the transaction reporting of WSL were raised.

WSL says Ernst & Young issued unmodified opinions on its financial statement audits from March 2007 which, while providing a list of breaches of the regulations, also stated WSL maintained systems to comply with the relevant FSA “client asset sourcebook” rules.

In March 2012, as a result of certain disclosures by WSL’s finance controller, the company learned there was a substantial shortfall in the amount of client money which ought to have been held in a segregated account and the amount actually held, it is claimed. WSL says the shortfall to clients may exceed £22 million.

WSL says Ernst & Young failed to consider the concerns of the FSA and failed to identify that financial statements and/or reports received from WSL had been manipulated. It also claims the accountancy firm failed to give an appropriate opinion on the financial statements and failed to ensure appropriate accounting policies were adopted by WSL.

It is also claimed Ernst & Young failed to recognise that circumstances existed that caused financial statements to be materially mis-stated and failed to report promptly to the FSA in light of the “multiplicity of breaches” identified in 2007.

The Irish Examiner reports that Single interest rate for all standard variable rate mortgages will be replaced by a different charge depending on how much the customer wants to borrow compared with the value of the house.

Director of lending Ger Mitchell said: “This is a much more sophisticated pricing model for mortgages which will allow us to reward customers who have a lower risk profile while charging a higher rate from customers who represent a higher risk by virtue of the amount of money they are borrowing relative to the value of the property.”

Anybody looking to buy a house and who is looking to borrow less than 50% of the price can borrow at 3.95%, which is 0.39% of the current SVR of 4.34%.

This will increase to 4.05% for a customer looking to borrow less than 60% of the house value; 4.15% to borrow less than 70%; 4.20% to borrow less than 80% of the value and 4.45% for less than 90%.

The bank will extend the offer to customers of other financial institutions who want to switch but who are not selling their houses.

PTSB is struggling to return to profitability. It is waiting for the European Commission to approve its restructuring plan to see it split into three units: a good bank, an asset management unit for its troubled assets and a separate UK business. Over half of its total loan book are mostly loss-making tracker mortgages.

In another report issued yesterday, a survey by the Professional Insurance Brokers Association (PIBA) found that there was a 13% surge in demand for mortgages over the first quarter of the year.

Demand is coming primarily from first-time buyers and mortgage holders looking to trade up. Rachel Doyle, chief operations officer at the association, says brokers are now seeing “the emergence of a three-tier market — Dublin and its commuter towns form the top tier, then larger cities such as Cork and Galway and thirdly, the rest of the country.”

The survey also found that increased demand was not being serviced by banks because of prohibitive lending criteria. Although the last PIBA survey over the last three months of 2012 showed an increased willingness to engage with customers in terms of restructuring solutions, that trend did not follow through to the first quarter of this year.

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