Business is going to end up paying more tax
The report of the Commission on Taxation, which was published last week, had nothing to say about increasing the 12.5 per cent corporate tax rate.
However, as the fiscal screws tighten, business is going to find itself paying more tax, regardless of whether or not the headline corporate tax rate is increased.
Ever since ex-Finance Minister Ruairi Quinn introduced a uniform company tax rate of 12.5 per cent in the mid-1990s there has been a widely held feeling within the Revenue Commissioners that the multi-nationals would have worn a higher rate of 15 or even 17.5 per cent.
However, 15 years on the 12.5 per cent tax rate remains the sacred cow of Irish fiscal policy. The Commission on Taxation steered well clear of recommending any changes and political support in favour of our low company tax rate remains virtually unanimous.
Will such unanimity survive the economic downturn and the resulting €20bn annual budget deficits? While the commission didn't recommend increasing the 12.5 per cent rate, it did call for the introduction of a number of changes in the tax system which would increase the amount of tax paid by business and business people.
Among the changes recommended by the commission were the abolition of the tax-free status of patent income, a crackdown on tax exiles, the introduction of a carbon tax and cutting the tax thresholds when companies are transferred within families.
The net effect of these changes, if they are implemented, is that companies and their owners will find themselves paying more tax.
While the 12.5 per cent rate has escaped unscathed for now, it might not be a good idea to bank on this situation continuing indefinitely. In the same week as the Commission on Taxation was publishing its report, more details were emerging of the contents of the Nama legislation.
Those with long memories will recall that when the 12.5 per cent rate was first introduced the government sought to distinguish between "trading" and "non-trading" profits. In what was widely interpreted at the time as an attempt to squeeze more revenue from the banks, only trading profits would have qualified for the 12.5 per cent rate with non-trading being taxed at 25 per cent. Unfortunately, the EU Commission refused to wear a two-tier company tax system leaving Quinn with no choice but to tax all profits at 12.5 per cent.
However, this week it emerged that not all of the losses booked by the banks on the loans which they sell to Nama will be tax-deductible.
With the Irish-owned banks now totally dependent on the goodwill of the Government for their very survival, it seems unlikely that they will be able to successfully oppose efforts to force them to pay more tax, either through a higher basic corporate tax rate or by scrapping tax-deductible items.
While the banks will be the first to feel the impact of the new, more bracing fiscal climate, other companies can also expect to pay more. This is something which all investors will have to bear in mind.
