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Commission on Taxation Report Ireland 2009: The Commission on Taxation has recommended the introduction of a new property tax, a carbon tax, and domestic water charges as part of a comprehensive overhaul of the Irish tax system.
At the launch of the 550 page report, the chairman of the commission Frank Daly said it contained over 230 recommendations which would broaden the tax base without increasing the overall tax take.
Daly, who is a former chairman of the Revenue Commissioners, said that some of proposals are radical and involve "taxing us in a way that we have avoided for decades." He stressed that the report was coherent and that the best outcomes would follow from its recommendations being implemented as a package.
The commission recommends a third higher rate of tax which he didn't specify; tax on child benefit and new incentive packages (one based on the Special Savings Incentive Scheme) to encourage people to invest in pensions.
The report recommends a property tax, estimated to yield between €1 to €1.2 billion per annum; a carbon tax (an annual yield of €500 million); and the new water charges.
New restrictions on high earners would also lead to more taxes.
The introduction of a property tax would also result in the abolition of stamp duty. The commission sets out two scenarios, one based on a 0.25 per cent of value tax and another on a 0.3 per cent of value tax.
Daly said the tax would be paid on the value of the property and would be self-assessed.
The report provides a theoretical example of how such a tax could work.
Properties in the €150,000 to €300,000 value range - - the most common in the State - - could face an annual charge per property of €593 per cent annum, raising €492 million for the Exchequer.
Properties in the next band - - €300,000 to 450,000 - - would be subject to an annual charge of €938 per year for each property. It says an "up-to-date" valuation base for all property and land in the State should be addressed as a priority.
Frank Daly said there would be exemptions and waivers for those on low incomes and also said that there should be different methods available to pay the tax.
House buyers who have paid stamp duty will be exempt from the property tax on their main residence for seven years.
The report also proposes a phased introduction of water charges over a five-year period, initially based on a flat rate charge but moving to a charge per use as meters are put in place.
Frank Daly said the situation in Ireland was anomalous and that Irish domestic users use a third more water than counterparts elsewhere.
He said that this cost between €680-€700 million currently with no incentive in the system to encourage conservation of water. The measure would raise some €500 million after five years and could involve costs for households of several hundred euro per annum.
The commission also recommends that, in principle, social welfare income should be taxed including child benefit. It outlined a number of exemptions and exceptions it recommends including maternity benefit, adoptive benefit and respite care. In relation to child benefit, the commission recommends the introduction of a new child tax credit to offset the tax payable for those in lower income households.
If such a tax is introduced, the commission says a child tax credit should be introduced to offset any additional tax payable.
The report also calls for the broadening of the PRSI tax base, saying a similar rate should apply to employees and the self-employed and says the current ceiling for employees should be abolished.
It adds that, as a general rule, those on the minimum wage should continue to be exempt from income tax. While the report does not specifically call for the introduction of a third income tax rate, it says such a structure "has merit."
The commission says there will be a natural tendency for all who will be affected - - which is almost all of us - - to argue that they are a special case and should be exempted. Where such argument is indulged, the inevitable consequence is to increase the burden commensurately on the rest.
It says it is twenty-five years since Ireland’s tax system was last examined in detail. The sixteen month timeframe for completion of our deliberations required it to concentrate on broad reform rather than detailed design.
"There will be areas which deserve more detailed examination and analysis sooner rather than later. We therefore recommend examination of Ireland’s tax system at more regular intervals in future. This should ensure that we continue to have a system that is responsive to emerging social and economic developments and is always ahead of the curve and never behind the game," the commission says.
On tax exiles, the commission says: "Residence rules are important as regards equity and protecting Ireland’s taxing rights. The present rules - - which are based solely on time spent in the country – need to be strengthened. We are recommending that the existing 183/280 days test for determining the tax residence of an individual be supplemented by additional criteria, which should include tests relating to a permanent home and an individual’s centre of vital interests."
The Minister for Finance, Brian Lenihan T.D., today said "the commission’s report provides a comprehensive examination of the Irish Taxation System that could set the framework within which tax policy will be set for the next decade. I hope this Report will improve the public’s understanding of the present tax system and foster discussion on the best approach to policy for the future.
I look forward to hearing considered responses to the commission’s report.”
The Minister acknowledged that the report, in conjunction with the report of the Special Group on Public Sector Numbers and Expenditure Programmes (Bord Snip), will undoubtedly contribute to meeting the immediate fiscal challenges that our country faces: “To achieve economic recovery we must address the different challenges that we face: stabilise our public finances, resolve the difficulties in the financial sector, and improve our competitiveness at the same time. This report will play a role in stabilising our public finances and improving our competitiveness. Already, the Government has taken significant steps in tackling each of these issues. Over the course of the last year, the Government has introduced measures – tax and expenditure – totalling nearly 5% of GDP which has improved the overall budgetary position. These measures and our overall medium-term fiscal plan have been welcomed by our European colleagues and various international bodies such as the IMF. The Government has also assisted in improving our international competitiveness by achieving a variety of cost savings in the public sector. The European Commission now expects that Ireland’s Unit Labour Costs will improve, this year, by 7% relative to our European competitors.”
The Minister also stressed the report’s longer term importance: “This report’s longer term strategic perspective and its focus on the future will help shape the taxation system for the next decade and beyond. Given that focus, the implementation of the many complex and often inter-related recommendations in the report are likely to be phased in over several years.”
The Minister noted that a central objective of medium term Government policy is to secure strong sustainable economic growth in order to create the conditions where we can enhance living standards, maximise employment, improve social provision and protect the environment on a basis that is fiscally sustainable. The primary function of the tax system is to provide the resources to finance public expenditures, to achieve income and wealth redistribution and to address social and environmental concerns. The tax system must also minimise taxpayers’ compliance costs and government’s administrative cost, while also discouraging tax avoidance and evasion.
The following are the main proposals of the Commission on Taxation:
The health contribution levy should be abolished and integrated in the income tax system.
Social welfare payments should be subject to taxation with exemptions for maternity benefit, adoptive benefit and health and safety benefit
Change in tax rules for non-residents with existing 183/280 days test for determining the tax residence of an individual to be supplemented by additional criteria including tests relating to a permanent home and an individual’s centre of vital interests.
Stamp duty on new properties should be zero rated with the introduction of a new property tax with exemptions related to income and up to seven years holiday for payers of stamp duty.
Stamp duty should continue to apply for investor purchasers of residential housing units.
An up-to-date valuation of residential, business, commercial and industrial property in Ireland.
Windfall gains related to increases in land values due to rezoning decisions should be subject to an additional capital gains tax charge.
A separate property tax should be introduced on land zoned for development that is not used for the zoned development.
The abolition of stamp duty on share transactions, reducing the rate of tax on dividends from ordinary shares, relaxing the close company surcharge provisions and easing the preliminary tax payment rules for both large companies and new non-corporate enterprises.
The introduction of a carbon tax to apply to fossil fuels, which should be based on tonnes of carbon dioxide (CO2) emitted by each fuel and it should be collected upstream, at the earliest point of supply. It should be visible at the point of final consumption, to help ensure that behavioural change aspects are maximised and it is not seen as "just another tax."
Amendments to the VAT Directive to allow lower rates for energy efficient goods and services
The VRT system should be replaced by a system based on car usage. Such a system should be introduced over a 10 year period.
A vehicle scrappage scheme, targeted at encouraging a switch to the purchase of electric and very low carbon emitting vehicles, should be considered.
All contributions towards supplementary retirement provision should qualify for a matching Exchequer contribution of €1 for each €1.60 contributed by the taxpayer.
The first €200,000 of lump sum given on retirement should be tax-free, while anything above that should be taxable at the standard rate.
Phasing out of stamp duty on ATM, credit and debit cards to promote a cash-free society.
Domestic water charges to be phased in over a five year period. Initially there will be a standard change, changing to a usage-based charge when metres are rolled out.
People made unemployed should be entitled to offset the retraining costs they incur on certified training courses against income for the previous six years.
Medical insurance relief should be continued on a more limited basis.
Income tax relief for trade union subscriptions should be discontinued.
The artist’s exemption should be discontinued; consideration should be given to introducing income averaging in the taxation of income from creative work.
A retirement savings scheme along the lines of the former SSIA scheme, that is easily understood and which involves an Exchequer contribution, should be introduced.
Water meters should be installed in all new housing units.
A public information campaign should be launched to clearly outline the rationale for water charges and the way in which they will be implemented.
Water pricing should be introduced for all water consumers by local authorities based on a consistent methodology and applying the principle of full cost recovery.
Frank Daly – Chairperson
Tom Arnold – CEO, Concern
Julie Burke – JMB Tax Solicitors
Micheál Collins – Department of Economics, Trinity College
Frank Convery – Heritage Trust Professor of Environmental Policy
Tom Donohue – Partner, Russell Brennan Keane Chartered Accountants
Eoin Fahy – KBC Asset Management
Brendan Hayes – Vice President, SIPTU
Colin Hunt – Division Director, Macquarie Capital Group
Sinead Leech – Director, Integral Finance and Technology Ltd
Con Lucey – Chief Economist, Irish Farmers Association
Danny McCoy – Director, IBEC
Feargal O’Rourke – Partner, PWC
Mary O’Sullivan – Irish Banking Federation
Mark Redmond – CEO, Irish Taxation Institute
Willie Soffe – Chairman, Dublin Transportation Office
Mary Walsh – Chartered, Chartered Accountant
Deirdre Somers – CEO, Irish Stock Exchange (resigned September 2008)
IBEC Chief Economist David Croughan said: "The report strikes a balance between the need to raise revenue in an equitable way and ensuring that the tax system facilitates economic growth and employment.
"Ireland's relatively low tax burden has been central to past economic success and is important for recovery. Tax reform should therefore be introduced on a revenue neutral basis, to avoid undermining economic growth and competitiveness."
IBEC welcomed the fact that no proposals were made to increase the corporation tax rate, which it said was central to job creation and Ireland's attractiveness as a place to do business. It also stressed that changes proposed to the income tax system must be designed to ensure that they do not act as a disincentive for high-skilled mobile labour from abroad.
On the issue of a carbon tax, Croughan said: "It is important that Ireland makes the transition to a low carbon, energy efficient economy. While a carbon tax has been planned for some time, it is important that it is introduced in a way that best promotes energy efficiency and the shift towards a low carbon economy. It will only succeed if it has the effect of changing the way we use energy and promoting more innovative ways of working."
In a welcome recognition of the needs of a modern economy the Commission recommends further improvement to the R&D tax credit and advocates the use of accounts depreciation over existing capital allowances in a recognition of the short economic life of assets in a rapidly changing technological environment.
"IBEC has certain concerns on the proposals with regard to pensions, as a new hybrid rate may reduce the incentive to save for those on the higher rate, with no guarantee that it would encourage those on the lower rate to increase their pension provision," concluded Croughan.
NCB Stockbrokers economist Brian Devine commented:
Perspective of different class of buyer
The new recommendations will increase the tax burden on FTB (First Time Buyer) as they were exempt from paying stamp duty anyways.
Mover-purchasers would be hit by the residential property tax but would no longer have to fork out the large up-front stamp duty payment.
The removal of stamp duty should breathe some life into the property market at the margin by increasing the likelihood of those households who were thinking of upgrading/downgrading/relocating to actually do so. However offsetting this is are the huge disincentives facing a prospective residential investor- property tax, stamp duty and falling rents.
The supply wall, hard to see it falling
We do expect the number of mortgage drawdown’s to increase as the economy recovers next year, and last week noted that even if number of FTB and residential investor mortgage drawdown’s doubled it would take 19.5 months to clear the market.
The Commission on Taxation recommendations however, hit the FTB and residential investor, the two key groups in helping to clear excess inventory.
Given the Commissions recommendations we now assess the scenario whereby residential investor drawdown’s stay at their current level and assume that only FTB buyer drawdown’s increase. It would take 28 months to clear all the properties in the market if FTB drawdown’s were running 50% higher than they currently are (the drawdown figure used as the starting point is seasonally adjusted). Table 1 clearly illustrates that if the residential investor is forced by taxation to become a bit part player in the residential market it will take an extremely large increase in FTB activity to help clear the back log of properties in the market.
Davy's chief economist Rossa White commented:
Commission's goal is to broaden tax base; corporation tax rate exempted from terms of reference of report
Note that this report is advisory only: it has issued recommendations that may be used to frame taxation policy in the next few years.
Commission's goal is to broaden the tax base —'lower taxes on a broad base' is better than 'higher taxes on a narrow base - - and to keep it revenue-neutral.
Ireland's corporation tax rate of 12.5% was exempted and remains a pillar of Irish economic policy.
Property taxation salient element of tax reform
A residential property tax is proposed, based on self-assessment of the value of a home. That tallies with the report's priority of broadening through property taxes ahead of consumption taxes and, lastly, labour.
But leaving aside the political difficulties, this cannot be introduced until a national property database is in place: the Commission stresses that this should be set up without delay. Because this will take time in reality, it is very hard to see a property tax being introduced for Budget 2010.
Stamp duty on principal private residences should be abolished; investors would still be liable to stamp duty.
No cut in stamp duty on commercial property is recommended; this is disappointing.
Commitment to prioritise low taxes on labour is positive
Report prioritises lowering the tax burden on labour, as part of base broadening measures. This is welcome, as labour income has already been hammered with tax hikes in the October 2008 and April 2009 Budget.
The government projected tax increases of €1.75bn for 2010 last April. The property tax will probably not come soon enough and the recommended carbon tax may only yield €500m. The economy cannot afford at least €1bn in further income tax hikes. In order to regain competitiveness and consolidate the fiscal position bigger expenditure cuts must be prioritised.
The Irish Association of Pension Funds (IAPF) has welcomed the some aspects of the pension proposals but claims some elements could discourage future pensions provision.
“The recommendation to allow all defined contribution occupation scheme members to have access to approved retirement funds (ARFs) is especially welcome,” commented Jerry Moriarty, Director of Policy, IAPF. “This has been a long standing policy objective of the IAPF to ensure fairer treatment of pensions and we see no reason why this could not be introduced in the next Budget.”
The IAPF also welcomed the positive steps to provide greater tax relief/credits for those on lower incomes as a means of encouraging more people to save for retirement.
But the IAPF expressed concern at the implications of the recommendation to replace the current system of tax relief on contributions by the Exchequer matching system of €1 for every €1.60 contributed by the tax payer. “Changing the taxation treatment in the manner suggested would we believe discourage pensions saving by a large number of middle income earners,” commented Moriarty.
He said that the Commission itself had stated that stated that,“care is needed so as to not discourage those with existing savings for retirement from continuing to save.”
Moriarty said that such a move would also create taxation anomalies and but added that the IAPF also welcomed the commission’s acknowledgment that any such change should be taken in the medium to long term and may be more appropriate to a more stable economic and retirement savings environment than exists at present.
“We have made the point in the run up to the report that now is not the right time to make radical changes to the pensions system we have in place. We do look forward to further opportunities to research and debate that issue,” he said.
“We also call for the publication of the long awaited framework on pensions by the Government. The commission’s report again highlights the demographic issues we face in the future and these have not gone away and must not be forgotten. While clearly there are many short term issues facing the Government we must continue to address the long term issues that face the country,” he added.
Mercer on pensions
Speaking in relation to the proposal to change the current system of marginal rate tax relief on pension contributions to a new flat State contribution of €1 for every €1.60 saved, Mercer chief executive, Paul O’Faherty, said: “This represents an effective rate of tax relief of 38.5% compared to the current rates of relief of 28% for standard rate taxpayers and 46% to 49% for higher rate taxpayers, when you take into account income tax, PRSI and the health levy.”
For standard rate taxpayers, this would be a significant increase in the incentive to save for retirement, although many such taxpayers may not be able to afford to make pension contributions.
For higher rate taxpayers, the proposal represents a reduction in tax relief compared with the present system. However, the majority will still have an incentive to save for retirement, as the effective rate at which retirement benefits are taxed may be lower than 38.5% (because a tax-free lump sum can be taken, and a lower tax rate may be paid in retirement).
Very high earners who have already saved enough to provide the maximum lump sum allowed from their pension scheme should consider curtailing their pension contributions, as the net effective rate at which the benefits will be taxed could exceed the rate of relief under the proposed system.
Given the demographic challenges this country faces, Mercer says that the incentive to save for retirement has been reduced for middle-income earners who most require to make provision in addition to the State pension.
O’Faherty added: “The key issue is what rate of tax people think they will end up paying after they retire. Taxpayers will have to consider their own circumstances and the likely future pattern of tax rates in deciding what to do. This is a complex task. The Commission’s intention was to simplify the pension system, but we fear that they have made pension planning more complicated for people.”
Chartered Accountants Ireland tax director, Brian Keegan, said: “In contemplating a property tax the Commission has clearly learned lessons from the Residential Property Tax, which was abolished more than ten years ago. The valuation bands they propose will make for a more robust system. There is no prospect however of such a tax being implemented in the short term – it would take time to set up the necessary infrastructure.”
Radical change was never going to come within the ambit of the commission, not least because of the broad scope of the Irish tax system as it already exists.
“The commission has taken a clear view that a key component of our tax system in the future should be consistency – that the tax take should not be as vulnerable to volatile market conditions. We see this in the proposals to displace Stamp Duty with a property tax, to displace Vehicle Registration Tax with taxes based on vehicle usage, and also in the suggestions for reforming the pensions tax system.”
“Foreign Direct Investment has underpinned much of our economic growth to date, and an important factor in attracting Foreign Direct Investment is our tax regime. Many of the commission proposals reflect the concerns of industry – for instance a better regime for multinationals headquartered in Ireland, and an enhanced arrangements for recognising investment in Research and Development,” said Keegan. The development of the Knowledge Economy would also be well served if the proposals for attracting highly skilled workers to the country were to come to fruition.
The commission’s analysis of the various taxation allowances and reliefs is carefully considered, and it highlights the extent to which the remaining tax reliefs are limited and controlled. “Ireland has moved over the past ten years from being a high tax rate, high tax relief economy to a low rate, moderate relief economy. The overall thrust of the Commission’s report does nothing to reverse this, but does recognise the role of tax incentives and reliefs in influencing business behaviour.”