Taxing Times: Budget 2017 & Current Tax Developments

Taxing Times: Budget 2017 & Current Tax Developments

Budget 2017 is the second budget in a row where the choices have been about how to distribute benefits; read our professional tax analysis.

Budget 2017 is the second budget in a row where the choices have been about benefits.

The Minister for Finance introduced the 2017 Budget (the Budget) on 11 October 2016. Further detailed measures will be included in the Finance Bill to be published on 20 October 2016.

Budget 2017 is the second budget in a row where the Government’s choices have been about how to distribute benefits rather than how to distribute austerity. The movement away from years of austerity will be very much welcomed by a population that endured severe hardship with remarkable discipline. This discipline combined with the skill of policymakers in retaining a very competitive business taxation regime has been crucial in restoring Ireland as one of the fastest growing economies in the developed world – this is best reflected by the growth in employment numbers in recent years.

Wary of repeating the mistakes of the past, the minister has continued the cautious and steady approach of previous budgets. This includes managing down the national debt and creating a “rainy day” fund for the future. Storing up grain during years of plenty has been wise policy since the days of Pharaoh - the minister’s proposals in this regard will be welcomed by prudence fans everywhere.

In his Budget speech the minister reiterated Ireland’s enduring and extraordinarily firm commitment to the 12.5% rate of corporation tax. This combined with the recent decision to appeal the EU Commission’s ruling on Apple demonstrate the Irish State’s unrivalled commitment and reliability as a partner for international business. This remarkable reliability has been demonstrated by successive governments of every stripe and now stretches back for six decades.

The minister indicated that he was alive to both the dangers and the opportunities arising from Brexit and this was influential in his decision to retain the 9% rate of VAT for tourism. This will be welcomed by the tourism sector much of which remains marginally profitable.

OECD research shows that, after corporation tax, personal taxes have the greatest impact on a country’s competitiveness. The importance of personal taxes will grow in the future due to the impact of changes in international taxation law arising from the OECD’s Base Erosion and Profit Shifting (BEPS) project, etc. It is well established by the laws of economics, and by common sense, that small, peripheral economies with relatively little mineral resources need to take particular care of their competitive position in order to compensate for the external diseconomies that they suffer. In our view, it has been clear for some time that attention needs to be given to Ireland’s personal taxation regime and in particular to the treatment of internationally mobile executives and domestic entrepreneurs. A degree of personal tax relief was included in the budget, building on that provided last year.

Key measures included:

  • A 0.5% cut in the rate of USC for low to middle incomes
  • A reduction in the rate of capital gains tax from 20% to 10% on up to €1 million of gains earned by entrepreneurs
  • Introduction of a first time house buyer’s tax credit with a value of up to €20,000
  • An increase in the main exempt CAT threshold from €280K to €310K with proportionate increases in the other thresholds 
  • A further closing of the gap between the tax credit available to the employed and the selfemployed 
  • A phased reduction of the rate of DIRT by 8% over four years 
  • A phased restoration of full interest relief for landlords over a five year period
  • A commitment to introduce a share incentive scheme for SMEs by 2018 
  • A €2,000 increase in the “rent a room” relief 
  • Extension of the Special Assignee Relief Programme (SARP), Foreign Earnings Deduction (FED) and “Start your own business” reliefs 

The continued policy of denying any tax relief on incomes over €70,000 is to be regretted. Ireland already has the most progressive income tax system in the EU and the second most progressive in the OECD - recent budgets, including this one, will have skewed this even further. The top 1% of income earners in Ireland already pay more than the bottom 75% combined and suffer marginal tax rates that are very high compared to competitor countries. There is a great deal of economic research that supports the proposition that those earning over €70,000 are being “milked” to a degree that is counterproductive i.e. the exchequer might actually collect more revenue if it were to reduce the income tax rates applying to this group and thereby attract more senior executives, entrepreneurs and related business activity to Ireland.

While the cut in the rate of Capital Gains Tax for entrepreneurs is to be welcomed the failure to raise the threshold to a level comparable to that available in the UK (or to that in the program for government) is disappointing. The minister indicated that the level of the threshold will be reviewed in future budgets.

It is to be hoped that future budgets will combine further tax relief for low to middle earners with personal taxation measures which maximise inward investment and domestic entrepreneurship together with the associated growth and jobs to the benefit of all our people.

Conor O'Brien
Head of Tax & Legal Services

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