47/49 Pearse Street, Dublin 2. Pre-Budget 2016 Submission. Using the Tax System to Combat Market Failures

Transcription

1 47/49 Pearse Street, Dublin 2 Pre-Budget 2016 Submission Using the Tax System to Combat Market Failures

2 Summary List of Main Recommendations End discrimination against the self-employed in the Irish tax system through the phased introduction of a self-employed tax credit and abolish the 3% USC levy on self-employed incomes of over 100,000. Assist workers on the average wage and above by reducing the top rate of income tax to 39%. Ensure that the Irish tax base is not compromised by the OECD Base Erosion and Profit Shifting proposals. Put the treatment of travel expenses incurred by non-executive directors in the commercial sector on an equal footing with their peers in non-commercial bodies. Change the EIIS and SURE to make these reliefs available to a broader range of businesses and compatible with how a business is commercially funded. Provide an income tax credit to individuals who move savings out of deposit accounts into SME ventures. Introduce a reduced capital gains tax rate of 12.5% on disposals of trading assets and shares of trading companies. Commence a public debate on the appropriateness of Legal Professional Privilege within the tax system. Increase the capital acquisitions tax thresholds in line with the thresholds in place before the economic downturn. 2

3 Table of Contents Summary List of Main Recommendations Introduction Treatment of the Self-Employed Tax relief for Individuals on the Average Wage Preserving Ireland s Corporate Tax System Ireland and BEPS Tax treatment of non-resident directors of Irish resident companies Supporting Irish Enterprise Tax Incentive for Entrepreneur Investments Reform of Enterprise Investment Incentive Scheme (EIIS) and Seed Capital Relief Professional Service Companies Lower capital gains tax rate for shareholder/owner of SMEs Certainty in a Fair and Transparent Tax System Address the inequities of Legal Professional Privilege as applied to tax Reporting of tax practitioners to Professional Bodies Capital taxes Rates and thresholds Base Cost

4 About CCAB-I The Consultative Committee of Accountancy Bodies Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland ) may be contacted if any further details in relation to any points made in this submission are required. 4

5 1. Introduction The presentation of the Spring Statement in April 2015 and the National Economic Dialogue in July 2015 were positive developments in the construction of the Budget for We also feel that the range of public consultations conducted during 2015 should make for even more coherent decision-making in the run-up to the next Budget. This submission summarises many of the points already made by the accountancy bodies through the National Economic Dialogue and the public consultation process. We note that many of the suggestions made in our last pre-budget submission were adopted either in whole or in part; there remain some matters which we believe still merit consideration and these are also included. There has been considerable improvement in the country's finances in the past 12 months, but the business community continues to experience market failure in key areas. We feel a primary consideration for any new tax policy is to ensure sustainability, whether that concerns taxes being raised or new reliefs being granted. 5

6 2. Treatment of the Self-Employed It is perverse that the tax treatment of the self-employed is harsher than the tax treatment of employed individuals. The critical social and economic challenge for the country has been unemployment, and no sector has achieved more in reducing unemployment than indigenous small and medium enterprise. According to the CSO, SMEs provide almost 70% of total employment. We estimate that there are some 100,000 of the self-employed active in the SME sector. There is a distinct bias within the tax system against the self-employed taxpayer in comparison to how employees are taxed. This bias is prevalent for all self-employed taxpayers from those on modest earnings right through to high income earners. The difference is clearly illustrated in the Budget ready-reckoners prepared by the Department of Finance. The analysis for Budget 2015 for example shows that the effective rate of tax on a single employee earning 15,000 is 1.9%. The self-employed person earning the same amount pays tax at 14.9%. This is taxation based not on how much people earn, but on how they earn it. The self-employed are charged a premium on their tax bill. They don t receive the employee tax credit, which adds an additional 1,650 per annum in tax over what their employed peer pays. And if they are successful, they pay a USC surcharge of 3% on earnings over 100,000. The Revenue Commissioners Annual Report for 2014 suggests that there is little or no difference in compliance between the self-employed versus those who pay their taxes under the PAYE system. Income tax payment compliance by the self-employed is running at 98%. Income tax payments from self-employed earnings are made in a more timely fashion than income tax payments from the wages of those in employment. The CCAB-I calls for a phased introduction of a self-employed tax credit over three years, to match the PAYE tax credit available to PAYE workers. 6

7 We also recommend the immediate abolition of the 3% USC levy on self-employed incomes of over 100,000. We estimate that the full year cost of this measure would be 125m. 7

8 3. Tax relief for Individuals on the Average Wage As with any progressive tax system where different rates are charged depending on the level of income, there are a few pressure points in the income tax system where treatment is especially harsh. The 40% rate of income tax begins to apply at just over the average wage, and we acknowledge the positive developments in relation to both the marginal rate and the 20% band introduced in Finance Act There remain approximately 325,000 taxpayers earning between 30,000 and 40,000 per annum. We suggest a further change to the top rate of tax, reducing it to 39%. This will benefit all income tax payers earning over the average industrial wage and in particular help this cohort which has to deal with the tax rate doubling from the 20% rate to the 40% rate. Such a decrease would cost approximately 226m in a full year. 8

9 4. Preserving Ireland s Corporate Tax System 4.1 Ireland and BEPS Ireland s tax regime remains something of a target in the discussion on global tax policy, despite the revision to the tax residence rules for companies introduced in Finance Act As the BEPS proposals continue to emerge, it is becoming increasingly clear that BEPS is a little more than a series of protectionist policies to benefit its G20 sponsors. Even EU legislation designed to protect the integrity of the single market is being side-lined. Few organisations anywhere in the world have engaged with the BEPS process as thoroughly as the CCAB-I. The following list of submissions made over recent months illustrates this: BEPS Action 6: Revise discussion draft (Prevent Treaty Abuse) BEPS Action 7: Revised discussion draft (PE Status) BEPS Action 11: Improving the analysis of BEPS BEPS Action 3: Strengthening CFC Rules BEPS Action 12: Mandatory Disclosures BEPS Action 5: Modified Nexus BEPS Action 10: Transfer Pricing, low value-added services BEPS Action 7: Preventing the Artificial Avoidance of PE Status BEPS Action 11: Methodologies to Collect & Analysis Data BEPS Action Consultation Response July 2014 BEPS Action 1: Digital Economy BEPS Action 6: Treaty Abuse Tax Challenges of the Digital Economy We understand that our international treaty commitments create a tacit obligation on this country to implement the main outcomes of the BEPS process. We intend publishing our own economic research on the consequences of BEPS changes shortly. This research illustrates the damage which will be done to the Irish corporation tax yield. 9

10 Early adopters of BEPS proposals will endure at least a year of uncertainty, maybe more, during which time other countries will have more compelling regimes. While some of those other regimes will remain under the spotlight, they will still exist. It may well be better judged not to move too soon on BEPS proposals, perhaps not before 2016, by which time Ireland will have a better sense of the new parameters and options. Not all of the BEPS outcomes might be clear by Budget 2016 day, nor even by Budget 2017 day. 4.2 Tax treatment of non-resident directors of Irish resident companies Irish business has available a relatively narrow pool of local expertise to meet the requirements for directors with appropriate skills and experience to sit on the boards of Irish companies both in an FDI context and for Irish business expanding into new markets overseas. In order that Irish business can get the best value and access to experts, nonresident directors recruited to join the boards of Irish resident companies must travel to Ireland to attend board of directors meetings here. We should not be penalising Irish businesses that avail of the expertise not otherwise available in this country. We are engaging with the timely review of the rules governing the general tax treatment of expenses which is currently underway. In the context of that review we are again suggesting that the Finance Act 2007 provision (section 195A Taxes Consolidation Act 1997) which exempts from tax the travel and subsistence expenses paid to certain members of noncommercial bodies, in both the public and private sectors, in respect of the attendance at meetings of such bodies be extended to cover payments to non-resident directors of commercial bodies. 10

11 5. Supporting Irish Enterprise 5.1 Tax Incentive for Entrepreneur Investments We recommend the introduction of a tax credit for equity investment made by an entrepreneur into their business. This credit would operate on a similar basis to section 253 Taxes Consolidation Act 1997 (TCA 1997) which provides for a deduction for interest on loans that were used to invest in a partnership. The tax credit for the equity investment would be based on the commercial interest rate applicable if the investment had been borrowed from a bank. For example, if the entrepreneur commits 20,000 of their own savings to their business, a tax credit equal to 20,000 x the appropriate commercial interest rate (say 6%) = 1,200 is available against the entrepreneur s income tax liability for each year the funds remain committed to the business or for a specified period, for example five years, whichever is lesser. At the proposed rate of relief, the cost to the Exchequer of providing 100m in funding to the SME sector would be in the order of 7m, comprised of the proposed 6m tax credit and approximately 1m in Deposit Interest Retention Tax (DIRT) foregone on money otherwise on deposit. The State has no exposure to the capital amount advanced. Section 253 TCA 1997 is no longer available for interest paid on new loans made on or after 15 October 2013 while the relief for interest on existing loans, which previously qualified for relief, is to be phased out from 2014 to 2016 with no further relief available in 2017 and subsequent years. This was a very valuable relief for individuals taking on loans for the purpose of investing in a trading partnership as it assisted in funding loan repayments. Therefore this relief should be reintroduced to encourage growth and innovation in partnerships which are an important component of the SME sector. The capital gains tax (CGT) relief aimed at own/managers is worthwhile (section 597A TCA 1997), however, a separate CGT relief to encourage angel investors should also be considered. The relief could be structured along the lines of the lower CGT rates available to 11

12 fund managers under section 541C TCA Such a relief would help stimulate much needed funding from sources other than banks. 5.2 Reform of Enterprise Investment Incentive Scheme (EIIS) and Seed Capital Relief A public consultation was carried out by the Government in 2014 which called for suggestions on how the Enterprise Investment Incentive Scheme (EIIS) and Seed Capital Relief could be improved. On foot of that consultation, a number of amendments were made in Finance Act 2014 which included an increased holding period from three to four years for EIIS investments, a reduction in the tax relief for investments in line with the 1% cut in the marginal rate of income tax, an increased funding threshold and extended eligibility to certain companies. Seed Capital Relief is now rebranded as Startup Relief for Entrepreneurs (SURE) with no amendments on how the relief operates. The rebranding of Seed Capital Relief to SURE has been accompanied by a marketing campaign to promote awareness of the scheme. Our members contend that such efforts are in vain as a properly functioning tax relief promotes itself and the rebranding will not change the fact that the relief is not fit for purpose given the restrictive conditions associated with the relief. The reason Seed Capital Relief was unsuccessful and why SURE will not improve matters is due to the fact that the relief ignores how an owner/manager puts funds into the company in the first place. The same issue also reduces the attractiveness of EIIS for owner/managers. Funding outside of Share Capital EIIS and SURE are predicated on the requirement for the investor to purchase shares in the company and to hold those shares for a four year period in the case of the EIIS and three years in the case of SURE. While this requirement is commercially appropriate for investments aimed at third party investors, it is not a tax efficient or a commercially appropriate means for the owner/manager to invest in their company. The exit mechanism of share sale, which is the only mechanism currently permissible, does not support the owner/manager s long term involvement with the business. 12

13 In general, owner/managers of SMEs make a personal investment in the business by way of a loan to the company. If a share investment is made then they must either liquidate or sell the shares in order to realise a return on the investment. SURE rules for owner/managers of SMEs require such individuals to dispose of the business they have worked hard to build up in order to get a return on their investment. Therefore the EIIS and SURE should allow for investment by way of loan to facilitate the long term development of the business and involvement of the entrepreneur. Tax relief for loans This could be structured by extending the definition of a relevant investment to a 15% investment made up of both equity and loan capital. Concerns on safeguarding genuine use of the relief could be addressed perhaps by linking the holding period to the loan/capital ratio. For example, a 15% investment made up of 5% equity and 10% loan might require a holding period of five years. Correspondingly, a 15% investment made up of 10% equity and 5% loan might require a holding period of one year. It may also be appropriate to introduce a preclearance mechanism to any refinancing of the loan capital, to ensure that the original funding purpose is adhered to. A clawback of relief would apply if the loan is repaid before the requisite holding period or the refinancing arrangement covers personal loans etc. 5.3 Professional Service Companies The ESRI 1 have recommended that restrictions on the types of enterprises and investors qualifying for EIIS and SURE should be eased. Professional service companies are equally capable of providing job opportunities but are excluded from the EIIS and SURE. Service companies have many uses for outside investment which would be used for equally worthy purposes as with other trading companies who can benefit from the EIIS and SURE. There are valid and legitimate commercial reasons for professionals to structure their business using a company. However, such companies are often treated with suspicion by Revenue. Revenue has noted its successes in tackling white collar non-compliance in specific sectors, including the medical profession and personal services companies 2. 1 P.113, Financing SMEs in Recovery, Evidence for Irish Policy Options. ESRI October P. 7, Annual Report, Revenue Commissioners

14 However, this sector review by Revenue must be put into context with the yield from noncompliance associated with the medical sector reported at 16 million in 2014 while total tax receipts for 2014 were 41.4 billion. Therefore a fair and proportionate attitude must be adopted by Revenue when judging the commercial basis for the majority of service companies and the contribution such companies make to the high level of tax compliance which generated 41.4 billion tax revenue in Surcharge inhibits growth in service companies CCAB-I supports the removal of the close company surcharge on professional service companies. It is very difficult for a professional service to expand and grow its trade from the re-investment of trading income due to the penal treatment of funds not extracted from the company. The simple step of removing the surcharge would place service companies on an equal footing with other trading companies and give such companies the same opportunities to expand and grow. 5.4 Lower capital gains tax rate for shareholder/owner of SMEs Section 597A Taxes Consolidation Act 1997, introduced last year, provides a relief for individual entrepreneurs who reinvest before December 2018 the proceeds of disposals of assets made on or after 1 January 2010 in chargeable business assets in new business ventures. While the introduction of such a relief is a positive step in that it acknowledges the need to reduce the capital gains tax (CGT) liability faced by entrepreneurs, the manner in which the relief operates means that is will be of limited value to any entrepreneur. This fact seems to have been anticipated as the estimated cost of introducing such a relief is 4 million per annum for the five years it is set to exist. Other jurisdictions, for example the United Kingdom, already operate a similar regime. However, the relief is far more substantial as it provides for a 10% CGT rate for individuals involved in a business on disposals of all or part of a business, the assets of a business after it has stopped trading or shares in a company up to a life time limit of 10 million. We recommend a similar relief be introduced in Ireland at a CGT rate of 12.5% on disposals of trading assets/shares subject to a life time limit. 14

15 A reduced rate of CGT on productive assets improves the after tax rate of return on such assets, thereby incentivising investment in business assets in the first place. The stimulus effect of reduced CGT rates in the Irish marketplace is borne out by the long term CGT exemption on principal private residences. It is not possible for us to analyse with any certainty the amount of CGT currently being paid on business assets. However, we estimate that this relief would be tax neutral if the value of transactions in chargeable business assets were to double. It is possible that, just as the value of transactions soared in 1998 following the reduction in the CGT rate from 40% to 20% because of a release of pent-up deals, there might be a corresponding short term uplift in CGT yield from the introduction of this relief. Such a rate reduction would also have a positive effect on economic activity which in turn would lead to an increase in other tax revenues, notably income tax, corporation tax and VAT. 15

16 6. Certainty in a Fair and Transparent Tax System 6.1 Address the inequities of Legal Professional Privilege as applied to tax Significant powers of information gathering have been granted to Revenue through the Mandatory Reporting Regime. We have no issue in regard to Revenue being granted powers provided that any such powers are proportionate and subject to appropriate checks and balances. However, specific exclusions from compliance are specified in the legislation where the information which Revenue might request is subject to Legal Professional Privilege (LPP). This provides an unacceptable commercial advantage to law firms providing tax services. In the UK court case, Prudential PLC & Anor v Special Commissioner of Income Tax & Anor [2009] EWHC 2494, LPP was described as where legal advice is sought in confidence from a qualified legal adviser in his professional capacity, privilege may be claimed for the communications made for that purpose. The idea behind LPP was to ensure that any person can feel confident in seeking advice about their legal rights and obligations and in particular advice about litigation or potential litigation. Equally, Revenue need information about taxpayers to ensure that they are paying the right amount of tax. It is quite right that there should be a balance between the right of Revenue to know and the right of the taxpayer to privacy. It is not right that this balance can be skewed when the taxpayer uses a legal adviser to deal with his tax affairs. Firms of accountants and law firms are not treated equally when it comes to providing information to Revenue. While providing for the Mandatory Disclosure of Certain Transactions Chapter within section 817J Taxes Consolidation Act 1997 states that Nothing in this Chapter shall be construed as requiring a promoter to disclose to the Revenue Commissioners information with respect to which a claim to legal professional privilege could be maintained by that promoter in legal proceedings. Case law has established that only legal firms can avail of this protection. 16

17 It is clearly in the public interest to have a fair, robust tax system within which taxpayers can know with certainty how they will be taxed. We suggest that LPP exemptions within the Taxes Acts will result in their sufficient prevalence as to be discriminatory affording some taxpayers greater protection under the law by virtue of the kind of firm they choose to handle their affairs. By extension this leads to an inference that advisors who qualify for the LPP exemption are preferred from an official policy perspective, even though they provide exactly the same service as those that do not qualify for the exception. This is clearly anti-competitive and of extreme concern to our members. Equally, the appearance of specific LPP provisions in the legislation is new, and can only be interpreted as an enhancement of the LPP already claimed by legal firms in respect of all advice that they provide and a recognition that this is accepted and will not be challenged by the State. We believe that a public debate needs to be conducted on the appropriateness of LPP exemptions within the tax system, the enshrining of such exemptions in the legislation itself as an enhancement of the fundamental legal principle and the preferential treatment of one set of advisers in this regard even where they provide the same service as those with the officially preferred qualification. Until this can be resolved we would suggest that the existing exclusions in the legislation be suspended and allowed to rest on the basic legal principle, and that no further legal enhancements to the LPP principle as it applies to those with a legal qualification be introduced until the basis for the preference being conferred is fully aired and understood. The Australian Government issued a discussion paper entitled Privilege in relation to Tax Advice to consider whether LPP ought to be extended to accountants and other tax advisers. Whilst no decision has yet been taken in the Australian context, interestingly the Supreme Court decision R (on the application of Prudential plc) v Special Commissioner of Income Tax on the subject of LPP, references the Australian Law Reform Commission s 2007 recommendation supporting the New Zealand model of creating a separate 'tax advice privilege. Australia also operates a common law system, comparable to Ireland and the United Kingdom. 17

18 Concerns in relation to how the mandatory disclosure regime operates in the Irish context surround LPP. Revenue apparently felt constrained, because of their interpretation of the LPP requirement, to operate carve-outs for legal firms offering tax advice which might otherwise be subject to mandatory reporting. Such a distortion of the agent market, where its unbiased operation is essential in a modern self-assessed tax regime, is not appropriate. The CCAB-I has called for this issue to be addressed in successive Pre-Budget Submissions since Reporting of tax practitioners to Professional Bodies Under section 851A (7) Taxes Consolidation Act 1997 (TCA 1997) a Revenue officer may use taxpayer information to report a tax practitioner to their professional body where the Revenue officer is satisfied that the work of the tax practitioner does not meet the professional standards of a professional body. However, Revenue s power to report a practitioner to a professional body introduces a two tiered system. This is because practitioners who are members of a professional body as defined under section 851A(1) TCA 1997 will be at a disadvantage compared to practitioners who are not members of a professional body and practitioners who are members of the Law Society (which is not included in the definition of a professional body under section 851A(1) TCA 1997). This provision shows further bias against the regulated accountancy profession which is unacceptable and should be corrected in Finance Act

19 7. Capital taxes 7.1 Rates and thresholds The rate of capital acquisitions tax (CAT), now high at 33%, has increased on a number of occasions in recent years as the economic downturn hit the overall tax take. At the same time the tax free thresholds have been reduced; the threshold between parent and child more than halved from 542,544 in 2009 to 225,000 in That reduction, coupled with an increase in property values in the past few years has made paying inheritance tax a real concern for many families who would otherwise not have had to pay. Such high rate of tax and low threshold is a disincentive for families to gift property and wealth until after their death. These issues supresses not only the tax take but also the growth and creativity of Irish business. We are of the view that the simplest way to address this issue is to increase the tax free thresholds. The increase should be in line with the thresholds in place before the economic downturn and we suggest that the 2003 levels be re-introduced. 7.2 Base Cost There are enormous administration difficulties both for Revenue and for taxpayers in determining over 40 year old in taxing gains derived from the disposal of capital assets. The need to re-base becomes more acute with each passing year. We recommend that there be an option to determine market value for assets held long term by reference to 5 April 1974 or 31 December 1991, the latter date being the commencement date for CAT aggregation purposes. 19