Budget 2015 was delivered on October 15th amidst a renewed positive economic outlook with strong indications of recovery. Fal ing unemployment to 2009 levels1, the IMF doubling of their growth prediction to 3.6%2 and Exchequer tax returns at 5.6% higher than forecast3 created hope that Budget 2015 would offer long-awaited repreive from austerity measures for Irish taxpayers.
This optimism was shared by the Government when Minister for Finance Michael Noonan announced a budget focused on ”securing the recovery, building for the future and broadening it to families across the country.” But do the budgetary measures succeed in these aims? How wil they impact Irish families, indigenous businesses and foreign investment into Ireland?
This report examines three of the changes made in this years budget, including changes to the income tax structure, removal of the “Double Irish” taxation practice and introduction of a tax relief from the oft-criticised water charges. Fol owing this analysis we identified a missed opportunity from the Government in Budget 2015 – stimulating economic and population growth outside of Dublin. To address this we have designed a targeted development incentive combining tax incentives for corporations and employees to encourage trade and utilise unoccupied housing.
Contents: 1. Analysis of Budget 2015: 1.1 Changes to the income tax rate structure 1.2 Removal of the “Double Irish” 1.3 Introduction of a water tax relief
2. Suggested Budget Measure 2.1 National commercial development incentive
Budget 2015 saw the Government seek to al eviate pressure on low and middle income earners by restructuring the income and USC tax brackets. The top rate of income tax was reduced by 1% to 40% and the level at which people begin paying the higher rate increased by €1,000 to €33,800 for single people and €42,800 for married couples with one earner4.
There were also changes to the Universal Social Charge brackets. The new USC rates are: • Up to €12,013: no USC charge • €12,013-€17,576 at 3.5%, • €17,577-€70,044 at 7%, • €70,045-€100,000 at 8%, • PAYE income in excess of €100,000 at 8%, and, • Self- Employed income in excess of €100,000 at 11%
These measures wil have a smal positive impact on families and individuals on low or middle incomes. It wil particularly benefit low paid part-time workers earning between €10,000 and €12,013 who wil now fal outside the USC tax net entirely. It is clear that the government hopes that these increases in take-home pay wil kick-start spending and economic growth, particularly in the retail and services sector.
However, higher income earners wil see relatively no change in their take home pay as they wil be expected to pay the USC at a new increased rate. Thus, when combined with the effect of the introduction of water charges this year many families wil see a negligble impact on their financial position and may wel be disappointed that budget 2015 offered no signi fcant repreive fol owing years of austerity measures.
Budget 2015 brought particular disappointment for indigenous Irish businesses through the increase in the top level of USC for sole traders earning over €100,0005. This acts as a disincentive for entrepreneurship despite the emphasis the Government has placed on encouraging Irish business. The disincentive of higher taxes on sole traders is a regressive move penalising taxayers who contributing to growth and creating jobs. Sole traders are already paying higher taxes than horizontal y-comparable peers whilst receiving fewer social benefits and therefore these USC increase hitting this group is unjustified and contrast with the Government’s enterprise strategy.
m u €700% n n €576% €600% r A €500% s Pe g €400% vin €293% €288% €300% ax Sa €196% e T €200% €146% m co €100% In €0% 12,000% 15,000% 25,000% 35,000% 55,000% 75,000% 100,000% 150,000% Gross Pay Per Annum Source: Taxation Annex to Budget 2015 Summary Measures
Positively, there were some encouraging measures for indigenous Irish businesses. The Foreign Earnings Deduction has been extended until the end of 2017 and has increased the number of countries included, while also reducing the minimum number of days to qualify. These changes are beneficial to companies hoping to expand abroad.
There were also income tax changes supporting the strategic goal of attracting foreign direct investment through changes to the Special Assignee Relief Programme. The programme has been extended to 2017 and the upper limit of €500,000 has been removed. These changes wil increase Ireland’s attractiveness to higher paid executives from abroad and thus to the companies they lead. However, the other income tax changes in Budget 2015 wil do little to attract high-earning executives. While the higher rate of income tax was reduced for people earning over €70,000 a year the marginal tax rate remains at 52%. This is higher than many countries competing for the same pool of foreign investment including the UK, US, France and Germany6 therefore acts as a disincentive to international y-mobile businesses considering expansion/relocation7.
1.2. Removal of the “Double Irish” Taxation Scheme
Amidst strong and growing international scrutiny and pressure the Government closed the “Double Irish” scheme in Budget 2015. This loophole al owed companies to pay little or no corporation tax by taking advantage of Ireland’s rule that Irish registered companies do not have to be tax resident. By funnelling royalty payments for intel ectual property from one Irish-registered subsidiary to another withe latter is usual y tax resident in a country with no or low corporate income taxes such as the Cayman Islands companies could reduce their tax liability.
The technique has been widely used by large US multinationals with subsidiaries in Ireland such as Abbott Laboratories, Apple, Google, General Electric and Starbucks. However, with public criticism from high-profile U.S. Politicians8, the EU Commission and the OECD claiming the move gave Ireland an unethical advantage over countries competing for investment, Ireland was coming under increasing pressure to remove the loophole.
The removal of the Double Irish wil see tax liabilities increase for the many multinational companies who currently implement this technique. Multinationals are crucial to the Irish economic strategy, employing over 146,000 people9 and a measure that would negatively affect the choice of both current and would-be multinationals from residing, operating and investing in Ireland would have a multi-bil ion euro economic impact.
But given a changing global tax landscape it appears the preemptive move is a prudent and well-structured one that wil have little negative impact. With such “double-tax” arrangements receiving worldwide negative publicity and international legal scrutiny Ireland may just be the first of a number of countries to eliminate the scheme. The EU Commission may put even more pressure on other countries like the Netherlands to close such a loophole having seen a successful outcome from such pressure in Ireland.
Furthermore, the phased nature of the removal i.e. for new entrant companies to Ireland in 2015 and in 2020 for existing companies in Ireland offers certainty as companies have time to plan their structural affairs in advance.
The announcement of the removal of the Double Irish was accompanied by the announcement of a proposed new “knowledge box” scheme. Ful details of the scheme have not been finalised but it would offer tax incentives for companies to develop new technology in Ireland, generating revenye and creating jobs.
This new scheme, however, must be careful not to fal into the same reputational pitfal s as the Double Irish or the changes would be redundant or worse reputational y for the Irish state and have a negative impact on investment attractiveness. The New York Times has already published a scathing editorial criticising the Government for announcing the Knowledge Development Box while scrapping the Double Irish.10 The newspaper claimed Ireland appeared "uninterested in true reform" under a headline, 'Ireland, Stil Addicted to Tax Breaks'.
1.3. Introduction of a Water Charges Relief
With Budget 2015 being delivered as a General Election in 2016 looms and just three days after 100,000 people marched through Dublin in protest against water charges it was of little surprise that the Budget sought to reduce the impact of the charges.
Budget 2015 announed an income tax relief which wil al ow taxpayers who are in the lower income tax rate of 20% to claim tax relief of 20% of their water charges, up to a maximum of €100 a year. Irish Water has estimated that the average annual household cost wil be €248 and thus the relief equates to an average €48 annual saving. The budget also announced a water support payment to households who are in receipt of the Households Benefits Package or the Fuel Allowance. The total cost of the reliefs to the government is estimated to be €40m per annum.
These reliefs however appear rushed and may fail to assist those intended. Indeed, since the announcement of Budget 2015 there have been continued water protests and the Tanaiste stated the Government’s intention to bring in further water tax reliefs.11 By offering the relief as a tax credit the measure wil fail to benefit many of the 280,000 people with incomes are below the income tax threshold, many of whom are not eligible for the Households Benefit Package. Additional y, the Fuel Allowance is only available to the long-term unemployed so the water support payment wil not be accessible to the 190,000 short-term unemployed who do not qualify for the payment.
The ICTU have criticised the government for failing to address the problem associated with lower income households and the affordability of the water charges. For a lower income family to qualify for the ful €100 relief, the remainder of their payable bil wil be €400 or more. This figure is daunting for low income users who are already financial y struggling.
2.1. National Commercial Development Incentive We identified three linked issues in Ireland not addressed by Budget 2015: 1. Unemployment and lack of commercial enterprises outside of Dublin 2. Excess demand for housing in Dublin 3. Oversupply of housing outside of Dublin and the plethora of “ghost estates”
The Irish property landscape is currently a divided one. Undersupply in Dublin has sent prices and rents soaring while in many areas of the country property sales remain static with an oversupply resulting in over 100,00012 finished and unfinished homes forming wasteful “ghost estates”.
Property prices in Dublin are rising at a rate up to 2.7% per month13, pricing thousands of families and individuals on lower incomes out of the market. It has created an urgent need for social housing, an issue the government have tried to address in Budget 2015 by al ocating €2.2bn towards building 10,000 such houses. But with over 20,000 applicants14 on the Dublin social housing waiting lists and as of September 2014 156 families being accommodated in hotels15 the scheme outlined in Budget 2015 is not enough. The measure fails to tackle the root causes of the problem that a growing number of economists, politicians and commentators are label ing as critical.
Contrastingly, in counties including Limerick, Donegal, Clare Leitrim and Mayo housing prices are continuing to decrease and over 100,000 houses remain empty or unfinished in Connaught, Munster and Ulster16. The problem is not a scarcity of housing but a 7 Group'A4'UCD' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Irish'Tax'Institute'Fantasy'Budget'Competition'2015'
scarcity of housing in areas where people want to set up home. We believe that this want is fuel ed by employment.
To address these issues we propose the charging of a reduced rate of corporation tax of 12% for seven years to companies establishing in Ireland if they establish in zoned rural areas. This wil encourage large international companies to set up in these areas and offer attractive employment and lifestyle opportunities to skil ed workers outside of Dublin.
The benefits of this proposal include: • Reduce the insatiable demand for housing in the capital and thus the housing prices bubble, making the market more accessible for individuals and families and reduce demand for social housing. • Increase demand for housing outside of Dublin lifting thousands from the trap of negative equity as house prices rise in a sustainable manner. • Stimulate the decimated construction sector in these areas to finish partial y built homes in ghost estates and build new homes where required. • Reduce unemployment, particularly in these areas where unemployment is above the national average and bring young, skil ed workers and families back to these areas which wil regenerate rural Ireland, heaviest hit by unemployment and emmigration during the economic crisis. • Generate funds for the Exchequer through large and medium enterprises establishing in Ireland and paying corporation tax, additional stamp duty, consumption taxes in these areas and additional smal and medium businesses establishing to cater for a growing population providing the double benefit of reduced unemployment and people joining the tax pool.
We recognise the importance of the certainty of the 12.5% tax rate to Ireland’s economy and enterprise promotion efforts. However, we feel that the short and targeted nature of this scheme merits a business-positive exception. Areas such as the south and west of Ireland are on the periphery of the European Union and a transparent scheme to address these economic problems benefits not just these areas but the Irish and European Union economies as a whole.
Budget 2015 succeeded in bringing some long-awaited growth measures and taxation reliefs to Ireland’s taxpayers. The proactive step of removing the “Double Irish” and the introduction of the “Knowledge Box” wil have a positive impact on Ireland’s tax reputation international y and continue to see multinationals chose Ireland as a location for investment. For individuals and families, the income taxation changes wil mean smal increases in take home pay and some wil qualify for additional tax relief to reduce the impact of water charges. These measures are perhaps symbolical y more important than financial y impactful to families as the end of cuts and austerity measures offers much hope for future budgets and economic growth.
The limited impact Budget 2015 wil have on households, individuals and businesses underlines the Government’s message of a tentative economic recovery. This budget could have done more to ensure that the reliefs introduced had a larger impact on intended beneficiaries such as through a more comprehensive water tax relief proposal and measures that encouraged rather than increased the tax burden for higher-earning self-employed taxpayers and entrepreneurs.
Pressing social issues such as the undersupply of housing for young professionals and families to buy or rent in Dublin, a stagnant property market outside of the Capital and a geographical y unevan recovery spurred by foreign investment were not addressed and a proposed Budgetary measure to positively impact these three interlinked issues is outlined in this report. It is hoped that the Government wil act on these issues in the near future to ensure that people of al generations and across al of Ireland wil experience much-awaited economic recovary.
For the first time since 2007 Budget 2015 brought no net cut to the Irish taxpayers. Comparitavely, the cumulative spending increases of €1bn may seem like a jackpot. But overal , this budget was cautiously positive, offering smal benefits to taxpayers and a strong reaffirmation of Ireland’s attractiveness for foreign investment.
2 . Yukhananov, A.,Irish Independent, “IMF Doubles GDP Forecast but Cuts Global 2. Yukhananov, A.,Irish Independent, “IMF Doubles GDP Forecast but Cuts Global Outlook”, October 08 2014. Available: http://www.independent.ie/business/irish/imf- doubles-irish-gdp-forecast-but-cuts-global-outlook-30647089.html. Last Accessed Nov 02 2014.
12. Webb, N., The Irish Independent, “It’l Take Us 43 Years to Fil All Empty Houses”, June 10 2012. Available: http://www.independent.ie/business/irish/itl -take-us-43-years- to-fill-all-empty-houses-26863864.html. Last accessed Nov 02 2014.
15. Lyons, R. (2013), Daft.ie Q3 Sales Report 2013, “Supply Shortages, Not a New Bubble, the Concern in Dublin”, Available: https://www.daft.ie/report/ronan-lyons- 2013q3-sale. Last accessed Nov 02 2014.