Tax Strategy Group Papers
Author:
Gerald Murphy
The Tax Strategy Group is a government interdepartmental committee whose brief is to examine and develop proposals for measures in the areas of taxation, PRSI and levies, for the annual Budget and Finance Bill. The committee is chaired by the Department of Finance, its membership comprising officials and advisers from the Departments of Finance, the Taoiseach, Health and Children, Enterprise Trade and Employment, Social Community and Family Affairs, and from the Revenue Commissioners.
Papers are prepared on various Budget options for the Tax Strategy Group (TSG). Finance has now published TSG papers which related to the 2005 Budget and Finance Act.
These papers are largely historical at this time, of course, but nevertheless indicate aspects of policy in various areas. Some editing of the papers has taken place which in itself demonstrates that policies are still rolling out and that a review of the papers may still offer useful insights. This article does not attempt a comprehensive review of the papers but merely dips its toes in to some of the more interesting waters.
Tax avoidance schemes
General power
The original report recommended a new general power which would clearly state the right of Revenue to obtain documentation and information relevant to the collection of all taxes and the duty of taxes to provide it. More specifically the TSG papers referred to the UK’s recent reporting procedures whereby promoters and users of tax avoidance schemes must make disclosure of the schemes in certain situations. Such a requirement might well seem to fall naturally within the scope of the general power referred to.
It ’s always a possibility that similar legislation might be enacted in Ireland. It may be appropriate to note some of the elements of the UK arrangements that might need to looked at more closely.
Scope of legislation
The UK legislation focuses on certain employment and “financial” products (the latter including loans, derivatives, repos, stock loans and shares as well as matters accounted for as loans under GAAP).
This may seem limited but given the Revenue approach to anti avoidance legislation whereby one device after another is apparently added to the list of prohibited activities, one must expect the scope of any equivalent Irish legislation to be expanded year on year.
The original UK proposals defined tax advantage in the context of corporation tax, income tax and capital gains tax. This means that stamp duty and its tax advantages were not part of the deal.
In any event, the product is at reporting risk where the main benefit of the product or one of them is the obtaining of a tax advantage. UK Revenue stated that this should not catch “everyday tax advice” though that is all very well for them to say. How much weight is the promoter or reporting taxpayer to give to the apparent “tax advantage” if one cannot be sure as to what it means.
Double jeopardy?
Does one flood the Revenue offices with irrelevant information? UK Revenue claim they will be happy with returns “without prejudice”, but if a taxpayer has made an effective admission that there is a tax advantage, it becomes a little difficult to defend against the application of, say, section 811 to the transactions in question.
Its almost like a case of double jeopardy; you are damned if you return and damned if you don’t
FoI
And then, what about accessing this under freedom of information? Will there be a requirement to return details of tax payers, (which demands confidentiality), or, if taxpayer’s details may be withheld, is this material in the public domain? And are we not all entitled to look at it if we need to make judgments as to risk management?
Legal professional privilege
Another point of difficulty rests in the area of legal privilege. There still remains in the UK law a difference of treatment between schemes promoted by lawyers and those promotes by accountants. Though it may be argued that there is in effect a level playing field given that lawyers’ clients report if the lawyer does not, the risks to the scheme are not quite the same.
Pensions taxation policy
The TSG papers do not suggest any major changes in the taxation measures used to “incentivise” private pensions but do have interesting observations on the present arrangements.
As we know, there are two major components of Ireland’s pension arrangements; a flat rate social welfare element provided by the State, and a voluntary earnings related element provided by the private sector.
Cost to the State
The incentive to contribute to private funding is significant although until FA 2004, there was no real mechanism for measuring the element of contribution and its cost to the State. The TSG reports an estimated cost to the State for 2000/1 of €2,615m but admits the estimate is suspect.
Interestingly, eleven of the fifteen old EU members have similar arrangements to Ireland’s, termed “EET”, as exempting contributions, exempting growth but taxing benefits.
It is not quite so exempt, of course; there are limits on the percentage of allowable contribution, earnings caps, and certain lump sum benefits are tax free.
Tax deferred is tax relieved of course, but it is argued that there is a cost to the State beyond simple deferral. This is because contributions are mostly relieved at the top marginal rate whereas benefits are usually taxed at a lower rate. There are voices then that argue that the cost to the State is too high, and that pension contributions should only be relieved at standard rate as with other reliefs.
Indeed there is an implication that the present system suits the higher taxpayers most and that the lower taxpayers or non tax-payers have little or no incentive.
The drawback to reducing the level of tax reliefs can be seen by a simple illustration. The TSG quotes an estimate that a single female aged 30 years on a salary of 30,000 would need to contribute at least 15% of salary per year to produce a pension of 18,000 on retirement at aged 60 years. But that is on the basis of marginal rate tax relief so extra contributions would be needed where relief is reduced.
Other measure
The State has increase incentives in other ways for example Approved Retirement Funds and PRSAs, though the take-up on the latter is apparently disappointing.
The TSG reports that sale of PRSAs by June 2004 reached 32,920 though there is no report of any target figure. But the report does say that if there is a slow take up the reason is not necessarily ineffective tax incentives nor is any improvement to be found in increased incentives. The report offers little in the way of suggestions to rectify the difficulty. Steady as we go seems to be the answer
Assuming a 15% target figure and given the cost of housing to couples starting out, it may not be surprising that there is a reluctance to put such a percentage of one’s income into pensions. So what does the TSG say on housing?
Housing taxation policy
The TSG paper rather usefully list out a number of taxation measure directly affecting the residential housing market, including:
• Mortgage interest relief with larger relief for first time buyers;
• Tenant’s rent relief;
• Mortgage interest relief for investors;
• CGT exemption for principal residence;
• Stamp duty reliefs for new and first time buyers of second-hand houses;
• CAT dwelling house exemption;
• Differential tax rates for dealing on development and residential land;
• Rent a room relief
• Reduced VAT rate on property.
The paper, perhaps inevitably, draws the conclusion that it is extremely risky to meddle with tax reliefs and tax measure in relation to housing matters as this can have unexpected consequences. The debacle following from the measures introduced in the wake of the Bacon report is reason enough for such a conclusion though the consequences of the meddling were not unexpected in every quarter.
The paper pointed out matters such as the fact that the level of house building in the State is far in excess of that achieved in other EU States – the ten new members not being included in the comparison – but it offers little in the way of analysis as to why house prices were shooting through the roofs of most people’s budgets and what effects, if any, current taxation measure had in creating that environment.
Bad moves proposed
It notes a report from the IMF stating that the dynamics of house prices here have been impacted by tax changes such as the reintroduction of interest relief for investors and that, as these changes have worked themselves through the system, interest relief should be withdrawn. It also suggests a market-based wealth tax mentioning in particular second homes. That sounds a little like the residential property tax we got rid of a few years back.
A report in 2004 of the Oireachtas Committee on the Constitution considered development charges and levies, planning gain agreements, annual site value taxation and CPO of land at current use value, but the political will to legislate for any of these must be seen as totally lacking.
The TSG paper also notes the criticism by the Irish Homebuilders Association of the State’s tax take from the final sale cost of new houses. However, it questions the validity of the calculation that 45% of the sale price accrued to the State through a combination of various taxes. Unfortunately, as the TSG does not refer to, nor does it attempt, an alternative calculation, this leaves an unhelpful gap in the figures.
In this as elsewhere, the TSG papers seem to lack concrete analysis, and, since they are offered as a basis on which the department of Finance may construct taxation measures, one might equally challenge the validity of some of those measures.
The final paragraph of the TSG paper on housing is striking:
“It may be useful for the Group [i.e TSG] to have a discussion on the current position with regard to taxation in the housing market”
The question is; a discussion with whom? And can it be transparent so that all who have a concern in the cost of housing – and that is all of us - may at least know what the policies might be based on.