Thursday 19 July 2018

Build on the Budget by focusing on helping entrepreneurs and taxpayers

Minister for Finance Pascal Donohoe TD Photo: Kyran O'Brien
Minister for Finance Pascal Donohoe TD Photo: Kyran O'Brien

Tom Maguire

Budget night is Oscar night for tax advisers. The law on which they advise will change in the Finance Act and they get a preview in the Budget of some of the forthcoming "attractions". Generally the act goes beyond the Budget in terms of law change and it's hoped that will be the case here.

Don't get me wrong, there was a lot of good tax stuff in the Budget unless you like the odd sugar-laced drink after your sunbed session. Both will cost more but you may have driven there in your electric car without a benefit-in-kind charge on it (if it's your employer's) or on the electric charge it got to get you there (on your car), so all good.

Income tax has been reduced because cash in hand matters. Earlier this year I wrote about the war for talent which suggested a share-based remuneration package for employees.

The Budget has proposed such a regime in the Key Employee Engagement Programme (KEEP) for SMEs where the employee will only suffer Capital Gains Tax (CGT) at 33pc on the disposal of the shares acquired, marking a potentially substantial saving on income tax (Small print: Subject to EU approval but engagement is expected to conclude shortly).

This is a step in the right direction in keeping appropriate talent sufficiently rewarded at entrepreneurial companies. But the question remains regarding the entrepreneurs themselves; there was no proposed reduction in the CGT rate which at 33pc remains one of the highest rates in the OECD. That matters. Especially when you consider the rate was 20pc back in 1998 having decreased from 40pc before that. When the rate dropped its yield increased substantially and we should think about this again.

Further, if an entrepreneur builds up a business then he or she can avail of entrepreneur relief which reduces the rate to 10pc on the first €1m of gains on disposing of the business. To qualify, among other conditions, an individual must own at least 5pc of the business and have spent a certain proportion of their time working there as a director or employee for three out of the previous five years, prior to disposal. However, the UK offers a 10pc rate on £10m of gains over a lifetime which allows an appropriately timed changing of the guard at the business.

This difference was not recognised in Budget 2018 and in my view should be considered in the Finance Bill to ensure competitiveness and encourage entrepreneurs.

On company taxation, the 12.5pc rate was once again reaffirmed, which is always welcome. There was a corporate tax amendment regarding tax depreciation for intellectual property acquired after the budget.

This change was brought about allowing for the "smoothing" of corporation tax receipts by restricting the allowances to 80pc of relevant income. The companies still get the allowances ,but over a longer period thereby accelerating tax payments for such companies.

The OECD's Base Erosion and Profit Shifting (BEPS) initiative required that profits accruing to such IP should be matched by appropriate "in country" substance. This was recognised by the Tax Strategy Group in their recent report, which shows that the claims for capital allowances on such assets have risen from €2.7bn in 2014 to €28.9bn in 2015.

It explains that "given the 2015 GDP revision, some of which related to the onshoring of IP, it was not unexpected to see a significant increase in capital allowances relating to IP". Arguably, the capital allowance was doing what it was supposed to be doing and smoothing prevailed.

We're already thinking of future budgets given the important public consultations accompanying the Budget documents. These came about following economist Seamus Coffey's impressive review of Ireland's corporation tax system.

But an equivalent review of the personal tax regime wouldn't go astray as it continues to be increasingly complex and marked by high marginal rates by global standards. Perhaps it could be considered as part of the proposed PRSI-USC merger initiative.

I've always said consultation with us decreases consternation among us. Therefore this process is welcome but some of the suggested changes in the proposed consultation would bring about significant impacts for corporate taxpayers, large and small.

Take transfer pricing. The current law applies to large companies' trading transactions. The consultation questions whether that regime should be extended to all corporate transactions between related companies.

Depending on circumstances that could bring about a mismatch regarding the taxation of such transactions at 25pc in one company with a corresponding 12.5pc deduction in the related company. The International Tax Strategy budget document speaks of maintaining a 12.5pc rate on trading income with 25pc for other income but such mismatch should be considered if the all corporate transactions suggestion were to be acted upon.

Transfer pricing requires arm's length prices to be charged for goods and services provided between commonly owned companies.

The consultation suggests including SMEs, meaning they may have to document their approach to charging related companies for goods and other services. That's a lot of effort which currently doesn't happen.

Other countries have specific reliefs for SMEs from transfer pricing and the question is whether the benefits arising would outweigh the resulting costs; hence the consultation. A period of almost four months is given for this consultation thereby indicating its importance. One of the Budget's biggest revenue raisers is the increased stamp duty on commercial property. It had been mooted that the rate would be increased to 4pc, which would have been fairer and would keep us competitive in our offering to foreign investors.

Like the Oscars, there are winners and losers in all budgets. We now await the Finance Bill for further detail.

Tom Maguire is a tax partner in Deloitte

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