Monday 14 October 2019

The Budget is pure theatre - and has failed in its role to support vital entrepreneurs


Heavy lifting: The Finance Bill will be published next week. Photo: Aidan Crawley
Heavy lifting: The Finance Bill will be published next week. Photo: Aidan Crawley

Liam Lynch KPMG

BUDGET DAY is always about theatre. It is about politics. It sets the higher-level agenda for reform.

The heavy lifting comes next week, with the publication of the Finance Bill. And even then, many of the measures in the Finance Bill will be driven by a global tax reform agenda endorsed by the EU. These measures include expanding Ireland's transfer pricing regime, changes to counteract international tax mismatches from hybrid transactions and more reporting on cross-border transactions.

The international winds of tax change blow through in the form of real law enacted in Ireland. Indeed, it can be argued that the real tax news this week, and of potentially greater importance for Ireland, will be the release of the latest OECD thinking on BEPS 2.0.

This is an international programme of work that seeks to agree a new global model for allotting the taxable profits of multinational corporations between countries. The ultimate outcome of this work could have very direct and long-lasting implications for the budgetary situation here.

There are immediate and obvious economic challenges facing Ireland. However, it is important that we keep our focus firmly on the important long-term challenges and opportunities. The extent to which the State's tax take is reliant on volatile sources is worrying. In a downturn, corporate profits tend to evaporate. In a downturn, bonuses paid to those lucky enough to be highly remunerated tend to fall.

This has happened before. At the time of the financial crisis, there was an immediate collapse in corporation tax, as well as income tax receipts caused by falling profits, no bonuses and pay cuts.

Given the immediate impact on higher earners, the highly progressive nature of the Irish income tax system meant that payroll taxes from the highest earners simply vanished overnight.

We are open to this very real risk again. Even in a moderate downturn, a significant portion of corporation tax could disappear. More worryingly, so too could a significant portion of income tax receipts that are heavily reliant on just 7pc of the highest earners.

In this context, it is regrettable that Budget 2020 has not looked to start the work of rebasing the tax system on a more sustainable footing. This is not about increasing rates, but rather it is about focusing on Irish indigenous entrepreneurs and businesses of all types.

It is about refocusing the system and the way tax is levied to encourage growth of local businesses and support their ambitions to become global players. It is about ensuring that, over time, we create a substantial cadre of Irish-owned and Irish-managed businesses that are here to stay - that is, in an economic downturn, they stay in Ireland and are committed to Ireland.

A focused approach involves tackling the extremely high rate of capital gains tax on business, which at 33pc is among the highest in the world. It involves allowing entrepreneurs the opportunity to extract cash from their businesses at reasonable rates, rather than having to sell.

The present regime requires giving away at least 55pc of what you make, and this is not an encouragement to reinvest and grow your business. It involves supporting intergenerational transfers of business, and not penalising those transferring past the age of 66 with a 33pc tax.

It is regrettable that Budget 2020 has not taken more steps to tackle issues for entrepreneurs.

The minister has asked his department to consider what changes could be made. It is critical that this sets the stage for a vision of real and vital support for Irish business owners. It is past time for Budget day to do more heavy lifting for Irish business.

Irish Independent

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