The newly installed Fine Gael-Labour coalition Irish Government introduced its first Budget over two days on 5 and 6 December 2011, with the difficult task of removing €3.8 billion from the Irish economy in 2012, while maintaining its mandate of job creation and the growth of the economy from deep recession. The savings will be achieved through cuts in public spending of €2.2 billion and the raising of €1.6 billion in additional tax revenue. Budget 2012 is the first Budget in a planned four year path to recovery for the Irish economy.
This Article concentrates on the main taxation measures introduced by Budget 2012.
Corporation Tax Rate
In line with the Irish Government’s commitment to preserve its status as a low corporation tax jurisdiction, the 12.5 per cent corporation tax rate on trading income remains untouched. This is despite repeated statements at EU Finance Ministerial level that Ireland’s low corporation tax rate provides an unfair advantage, particularly in the case of multinational companies seeking a base in the EU. The 12.5 per cent corporation tax rate is the cornerstone of Ireland’s competitiveness as a financial centre and is likely to be vigorously protected by the Irish Government while it works towards financial recovery.
A significant amount of the additional tax revenue will derive from indirect taxation, and the increase in the standard VAT rate from 21 per cent to 23 per cent was well publicised in advance of the Budget. Indeed, the Irish Government voiced concerns in the weeks leading up to the Budget that documents relating to this aspect of the Budget had surfaced in a German parliamentary committee. It appears that the information was leaked following discussions between the Irish Government and the so called ‘Bailout Troika’ of the European Commission, the European Central Bank and the International Monetary Fund, causing embarrassment at national and EU level. The Government has committed to no further increases in VAT during their term.
Changes were also brought about to the domicile levy introduced in 2010. The levy of €200,000 is charged annually on individuals who are Irish domiciled and Irish citizens (regardless of their tax residence) who have a certain level of assets in Ireland (€5 million) and whose worldwide income exceeds €1 million, and whose liability to Irish income tax is lower than €200,000. A credit is allowed for any Irish income tax paid. The policy is to ensure that every wealthy Irish domiciliary, who pays little or no Irish income tax, should make a contribution during a time of fiscal difficulty.
The change brought about under Budget 2012 is the removal of the ‘citizenship’ condition for the payment of the levy, which will broaden the base for the levy and make it more difficult to avoid by tax exiles effectively renouncing Irish citizenship. The initial introduction of the levy in 2010 yielded tax revenue far below the level that was envisaged, and it is apparent that less than a dozen people were actually impacted by the levy. It remains to be seen whether the change brought about by Budget 2012 will give rise to much in the way of additional tax revenue, and the Government has not released any projections of how much additional tax revenue this change will create.
Remittance Basis of Taxation for Non-Domiciliaries
No changes have been made to the remittance basis of taxation, which means that non-Irish domiciled persons continue to be chargeable to Irish tax on foreign income and gains only to the extent that they are remitted to Ireland. This is particularly attractive for high net-worth individuals, who through careful planning can structure their overseas income and gains to mitigate or eliminate their exposure to Irish tax. A similar tax regime operated in our near neighbour, the UK, has been made less attractive in recent years by the UK HMRC.
The business measures include the introduction of a Special Assignee Relief Programme to attract people with key skills to Ireland. The objective is to create more jobs and facilitate the development and expansion of businesses in Ireland.
A Foreign Earnings Deduction Programme is being introduced to support efforts by multinational and indigenous firms to expand into emerging markets. The targeted deduction will apply where an individual spends 60 days a year developing markets for Ireland in Brazil, Russia, India, China and South Africa.
Improvements to the R&D scheme are also indicative of the Government’s focus on encouraging Irish SMEs to undertake the type of research that will drive new innovation, with a view to this being converted into actual global sales opportunities.
A range of property measures were announced in Budget 2012, including a reduction in stamp duty to two per cent (from a maximum of six per cent) on commercial property, coupled with a capital gains tax exemption on properties bought within the next two years and held for at least seven years prior to disposal. This should assist in attracting foreign investment into the property market, which has reached a virtual standstill.
Finance Minister, Michael Noonan, said that the Government had been unable to develop a scheme to tackle the controversial practice of upward only rent reviews, which have been the subject of much discussion within the retail sector. He said that any such measure would “be vulnerable to legal challenge or require compensation to be paid to landlords”. This represents a significant u-turn on Government policy, which it is widely accepted will put retail jobs and businesses at further risk in an already difficult market.
Given the existing high marginal income tax rate in Ireland (of close to 50 per cent), the decision to leave income tax rates, bands and tax credits untouched will be welcomed by taxpayers, many of whom are managing mortgage repayments significantly out of step with their after-tax income, and who are facing many years of negative equity in relation to their family homes. In order to relieve the burden on stressed home owners who bought during the height of the property bubble, mortgage interest relief is to be raised to 30 per cent (from its current rate of between 20 per cent and 22.5 per cent) for first time buyers who purchased between 2004 and 2008.
Expected changes in capital gains tax and capital acquisitions tax (which applies to gifts and inheritances) were confirmed, with the rates of both taxes rising from 25 per cent to 30 per cent. There was additional bad news for children who receive gifts or inheritances from their parents, who will see the tax-free threshold for capital acquisitions tax drop by 25 per cent to €250,000 in addition to contending with the five per cent hike in the tax rate. This can, however, be justified to an extent in the context of reducing asset values since the height of the economic boom.
Another widely expected development was the introduction for 2012 of a blanket €100 household charge on the owners of residential property (including family homes), in advance of the introduction of a graduated property tax to be calculated on a valuation basis from 2014 onwards.
The most influential Irish economic commentators are agreed that the measures announced in Budget 2012 are likely to dampen economic growth in the year ahead. The Irish economy is now projected to expand by 1.3 per cent in real GDP terms in 2012, down from the estimated 1.6 per cent in early November 2011. Real GNP is now expected to expand by 0.7 per cent, down from an estimate of one per cent in November 2011.
The Irish Government is committed to continuing what it sees as a successful Irish programme of rebalancing the State finances under the supervision of the “Bailout Troika”, with the aim of ensuring that the General Government Deficit drops below three per cent of GDP by 2015. The taxation measures introduced by Budget 2012 are designed to continue the necessary level of budgetary adjustment, with the prospect of a succession of further hard-hitting budgets to follow in the years ahead.
Given the condition of Irish finances, Budget 2012 was not expected to bring much in the way of good news, and there remain significant further challenges to be overcome if Ireland is to meet its deficit reduction target.
Cormac Brennan is a solicitor and tax advisor, and a Partner in O’Connell Brennan Solicitors, Dublin. O’Connell Brennan is a boutique private client law firm, established in 2012 by Susan O’Connell and Cormac Brennan following the demerger of the private client practice of McCann FitzGerald Solicitors.