It’s a retrograde step to stop using personal tax incentives

Happening almost unnoticed, as well it might at this time of the year, is three separate pieces of new tax law are in preparation. 

One is to give legal effect to the budget, one is to defer changes to Local Property Tax, and the last will change the way taxpayers can appeal a decision of the Revenue Commissioners.

This is quite unusual.

We don’t usually have this many changes to the tax system.

These pieces of law are laying the ground rules for 2016.

The rules of engagement for taxpayers are changing.

The era of personal tax reliefs is over.

Personal tax reliefs of all shapes and sizes were either curtailed or abolished completely during the recession.

Relatively minor reliefs such as tax relief for trade union subscriptions and bin charges disappeared off the statute books entirely.

Relief for medical expenses and pensions was curtailed.

The key criterion for introducing a tax relief is that the relief might tackle a failure in the market, making something happen that mightn’t happen otherwise.

This year saw continued market failure in businesses being able to source funds, and a shortage in supply of reasonably priced rented residential accommodation.

Little enough was done in the tax system to improve this situation.

On the funding for business side there were changes to the Employment and Investment Incentive Scheme, which gives income taxpayers a tax break for investing in some types of commercial venture.

However, its restrictive conditions, especially for longer established businesses, mean it will never be hugely effective.

On the rented accommodation side, a new relief for a landlord who takes on a tenant receiving housing benefit can only be claimed three years into the future.

This is hardly an immediate incentive to address an immediate problem.

Because no effective personal tax reliefs have been introduced to address these obvious market failures, we can conclude that the era of personal tax reliefs has ended.

It is a retrograde step to stop using focused tax incentives. However, an era of business tax reliefs has recommenced.

There was some genuinely useful stuff in the budget for domestic enterprise.

Short of winning the lotto, the most tax efficient way of generating wealth is to create value in a business you yourself owns and then sell it on.

That’s because of a new reduced rate of capital gains tax for entrepreneurs.

I’m also optimistic there will be benefits for indigenous industry from the new Knowledge Development Box incentive.

Irish companies making profits from selling products which they themselves invented in this country will in future pay only a token amount of corporation tax.

The applicable rate is 6.25%.

During 2015 the multinational tax affairs of Apple, Google and Starbucks continued to make headline news.

There is concern not all taxpayers are fairly treated.

Early in 2015 two EU commissioners, Margrethe Vestager, commissioner for competition, and Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, published a comment piece headed “Fighting for fair taxation” in newspapers across Europe.

Ireland was unfairly painted in a bad light. I have no doubt this “fight”, as they call it, is an honest endeavour on the Commission’s part.

However, it is somewhat hampered by the fact that Commission president Jean-Claude Juncker was the main man in Luxembourg where a lot of the more aggressive multinational tax planning is reported to have taken place.

The scrutiny will continue and not just by the Commission.

Only a few weeks ago, the president of the European Central Bank Mario Draghi publicly criticised the measure in the Irish budget which would reduce levies on electronic transactions but increase levies on cash transactions.

On the far side of the Atlantic, there is growing concern over so-called corporate inversions.

An inversion happens when a smaller non-US-based company becomes the headquarters of a larger US-based group of companies.

This change in headquarters can have the effect of taking the profits of the US-based group out of the charge to US tax.

Sometimes the headquarters ends up in Ireland.

Inversions happen because of quirks within the US tax system rather than because of features within the Irish tax system.

That fact won’t stop foreign political comment and scrutiny of how we do things here.

We are not good at doing new taxes. Irish people grumble long and loud about income tax and VAT and the like, but we get on with it and by and large pay them.

The current Government introduced three significant new taxes on top of what taxes we already have.

The first of these was a levy on private pension savings.

It was brought in to compensate for the reduced 9% rate of VAT in restaurants.

Because it only applied to private sector pension savings it was fundamentally unfair.

It has now been abolished. The second new tax was Local Property Tax.

There are arguments this too was unfair, but at least it was introduced fairly.

As this newspaper has highlighted, the legal standing of the property tax has been undermined by a lack of commitment to keep up to date the property values on which it is based.

The third new tax, strictly not a tax but it certainly feels like one, is the Water Charge.

The main problem here is the dilemma of enforcement.

None of these three new charges will ever become public policy textbook examples of how citizens should be taxed. But it’s not all bad news.

Most of us will pay less tax in 2016 than we did in 2015. It would be dismal to lose this gain because of short-term election promises.

Our public services are still nowhere close to where we’d like them to be.

Brian Keegan is director of taxation at Chartered Accountants Ireland