Kieran Coughlan: EU rules give advantage to ‘down under’ milk rivals

ICOS, the umbrella body for the co-operative movement, recently launched its proposal aimed at addressing income volatility in the dairy sector.

Kieran Coughlan: EU rules give advantage to ‘down under’ milk rivals

As part of the Agri-Taxation Review in 2013, many participants highlighted the need for taxation tools to deal with volatility, and in fairness to ICOS, it has since been advocating the introduction of such measures to support Irish farmers.

At the inaugural “National Economic Dialogue” which was set up by the Department of Finance and the Department of Public Expenditure, ICOS suggested an income deferral tool whereby farmers can move their before-tax income from years they need it least, to years when it is most needed.

The launch of the 5-5-5 scheme last month fleshed out its proposal in full detail.

Each of the “5s” they refer is explained as follows:

* 5-year income averaging: The scheme should be open to farmers participating in the 5 year income averaging scheme already in place

* 5% of annual milk receipts: The scheme will permit a farmer to voluntarily defer up to 5% of their milk receipts in any one year

* 5-year draw down period: The scheme will allow the deferred funds to be drawn down at any time within a maximum of five years, and subject to income tax at the time of draw down

In relation to income averaging, it’s a pity that ICOS sought to restrict the scheme to farmers who are participating in the five-year income averaging scheme.

There are a variety of instances where farmers are precluded from accessing income averaging, which would suggest such farmers would also not be in a position to benefit from ICOS’s proposal.

For instance, farmers with a separate trade or profession (a contracting enterprise, for example), or whose spouse or civil partner is carrying on a separate trade or profession, are excluded from income averaging.

So too are farmers or their spouses/civil partners who are proprietary directors of a company (owning more than 25%).

Also excluded from income averaging are new entrants ; they must carry on a trade of farming for four years before being in a position to opt into averaging.

Separately, the deferral of 5% of income will have a relatively small capacity to mitigate against volatility, when it comes to building up a contingency fund.

For example, the 2013 National Farm Survey suggested average dairy farm profits when milk were at their peak prices amounted to €67,847, with total gross milk sales totalling €139,095.

Were an income deferral scheme in place in 2013, the average farmer could have set aside at best just shy of €7,000 as a contingency fund.

Bear in mind that milk prices have collapsed by 33%, meaning total gross output from milk for 2016 (assuming the same level of production) would have dropped by a massive €46,000 from these peak levels.

In an era where milk price fluctuations are in the order of 25% from mean values, one would expect a farm volatility tool to be capable of capturing such fluctuations.

Although heavily supported at the Agri-Taxation Review, income volatility tools along the likes of the New Zealand income equalisation scheme and the Australian farm deposit schemes were shot down on the basis that such schemes would not comply with EU State Aid rules.

ICOS’s more restricted approach seems to have overcome this, suggesting they had devised the “5-5-5” scheme in order to comply with EU state aid rules.

Rather than trying to squeeze a mediocre arrangement through the existing state aid procedure, perhaps collectively the EU’s farmers can use the current crisis to change state-aid rules to allow us all to implement a more robust scheme putting us on par with our New Zealand and Australian counterparts.

ICOS dairy committee chairman, Jerry Long, noted (and I concur) “It is deeply frustrating to experience another damaging market downturn without appropriate agri-taxation measures in place to help dairy farmers.”

Huge credit is due to ICOS for bringing forward proposals, and indeed for coming up with a scheme which can fit within EU state aid rules, but given the huge degree of volatility in dairy incomes, we should be pushing for parity with New Zealand and Australia.

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