A steady Budget, but the devil could be in the detail of upcoming Finance Bill
'Oscar night for tax consultants" came and went but the devil will be in the detail coming in the Finance Bill. That's due to be published later this month and for the past couple of years has been signed into law by the President on Christmas Day so there's a bit to go yet.
The Budget mentions two anti-avoidance provisions for companies. According to its summary of Budget measures document, the Government expects not one cent in tax from either of these provisions. Why? Because this is exactly where taxpaying companies don't want to be and indeed the numbers suggest that they won't put themselves in harm's way. Therefore, these measures are deterrents, ie the "you can look but don't touch" kind of tax law.
The first measure comprises the introduction of the Controlled Foreign Companies rule, which allows us to tax other countries' money where the respective foreign company (controlled back home) exists to engage in certain non-genuine arrangements with an essential tax-advantaged purpose. Readers will recall that was the subject of my previous column.
The second was the introduction of the new 'exit tax' for companies and that was unexpected. This means that, for example, when a company leaves Ireland it will be deemed to have disposed of and reacquired all its remaining assets. This is a tax based on "imagine land" facts, in that no disposals of assets actually occur but the company pays the tax as if it did. The aggregate of chargeable gains and losses arising will be subject to Capital Gains Tax. The glass-half-full view is that the rate to be applied isn't the normal CGT 33pc rate but rather a 12.5pc rate.
This was brought about because of the EU's Anti-Tax Avoidance Directive (ATAD), which we have no choice but to comply with. Here's the thing: the ATAD says that the exit tax has to be in Member State's tax laws by December 31, 2019 and it should apply from January 1, 2020; we brought it in at midnight on Budget night this year. We've complied with EU law almost a year and a quarter ahead of schedule.
The detail of both provisions will be fleshed out as part of the upcoming Finance Bill. I've previously said in this column that our tax law doesn't have to be the swot in the planet's international tax class. That said, I'm reminded of the line from a movie I saw years ago "When all else fails, we don't." All you have to do is look at the Corporate Tax roadmap to see how far we've come since the dark days of the crisis.
Arguably, the more intriguing side of the Budget was what wasn't in it. I've previously written about the Tax Strategy Group's (TSG) Budget 2019 papers. The TSG is a government think tank chaired by the Department of Finance with its membership comprising senior persons from a number of Civil Service offices. The group spoke of potential changes to Capital Gains Tax (CGT) and I'll get to that in a second.
Reliefs from CGT, similar to those brought about back in 2012, albeit for landlords this time, were being mooted right up to minutes before the Minister took to his feet last Tuesday.
The speculated relief was a reduction in a landlord's CGT bill where he acquired a property with a tenant in situ and where the landlord held on to that property for a number of years.
The minister said nothing on this, so will we see it as part of the Finance Bill? However, he did increase the landlord's interest deduction against rental income to 100pc of the interest from January 1, 2019, thereby making renting less costly for that owner and making it more attractive to stay or enter the rental market.
But back to the TSG: It estimated as part of its Budget 2019 capital taxes document that, absent "behavioural change", a 1pc reduction in the CGT rate would lessen the tax yield by about €34m annually. However, behaviours will of course change when tax goes down.
High CGT rates can lead to people holding assets too long, which can stifle economic growth by blocking the beneficial shifting of resources from lower to higher value uses. This can hurt small startup companies because investors may have a reduced incentive to sell investments in favour of newer companies' offerings.
The TSG argued that reduced CGT can encourage entrepreneurship. Low taxes can encourage outside investment because the incentive for taking risks on young companies is a possible gain years from now.
Granted, the TSG recognised the possibility of an initial rise in tax revenue from a CGT rate reduction but argues that it might be transitory based only on the increased sell-offs immediately after the change. A reduced rate may also bring forward asset sales which would have happened anyway. Jam today is better than jam tomorrow.
The TSG suggested moving to a 30pc rate over one or two Budgets or moving to a 25pc rate over a two- or four-year period. Its "alternative" to changing rates involves a more targeted approach, saying that if the specific policy option aim is to improve the environment for the formation or maintenance of business activity then changes at a sectoral level may be more appropriate.
The group suggested a change to 'entrepreneur relief', which right now allows a 10pc CGT rate on chargeable gains arising on a disposal of qualifying business assets up to a lifetime limit is €1m.
Suggested options include increasing the lifetime limit to between €5m and €15m with a resulting cost of between €49m and €56m in a full year. The paper notes that the cost to the Exchequer of introducing a €15m lifetime limit is lower than the cost of a 3pc reduction in the overall rate. The UK's current limit is miles ahead of our current one. I had previously suggested in this column combining the TSG suggestions. The Minister didn't say anything on the TSG's suggestions, but he did continue the startup regime for companies for another three years until 2021.
This was a steady-as-she-goes Budget (albeit with some surprises, some by omission) and maybe the Finance Bill's detail will make some waves.
- Tom Maguire is a tax partner in Deloitte
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