24 Sep 2017 | 04.15 pm
Interview: David Fennell, President, Irish Tax Institute
Institute wants comprehensive review of high marginal tax rates
24 Sep 2017 | 04.15 pm
David Fennell heads up the tax technical function at EY Dublin where he advises clients and other tax professionals on a wide range of domestic and international taxation issues.
As Brexit looms, the Irish government is urging businesses to look to new markets beyond the UK. The view from Irish Tax Institute is that Ireland’s tax policies are not matching the needs of the indigenous sector and will not drive the shift in behaviour that is required. Can you elaborate on the barriers in the tax environment and what needs to change?
We have a lot of positives in Ireland and we must give credit on that front, for example our 12.5% corporation tax rate is valued by many Irish businesses. However, in the Institute’s recent report A Future Tax Strategy to Grow Irish Indigenous Exports, we have highlighted the fact that Ireland also has a pattern of sustained high rates across a range of other taxes that are critical for growth and we have tax reliefs that are either not available or not accessible to Irish SMEs. This is problematic if we are serious about growth.
Ireland’s 33% capital gains tax rate is the fourth highest in the OECD. It is dampening business activity in Ireland in terms of the required scaling and capital investment that is central to creating activity in the economy.
We know that Irish SMEs are more reliant on bank finance than those in other EU member states and that they need to diversify into other equity sources of finance so our CGT regime is critically important.
High tax rates are also evident in the personal tax landscape, despite the backdrop of skills shortages. Employees in Ireland have some of the highest effective tax bills in the world as salary levels rise above the average wage.
We need a comprehensive review of our high marginal tax rates, the breadth of our tax base and the entry points to income tax, USC and PRSI. We appreciate that not everything can be achieved in this Budget but we do need to see movement on personal taxes over the coming years if Ireland is to remain competitive. We also need to revisit out of date travel and subsistence rules to align them better to modern work practices.
We know that R&D and innovation are key to creating new products and new customers and every effort should be made to remove administrative blockers for businesses that need to claim the R&D tax credit. Both the IMF and EU have been telling us that medium and long-term growth will be driven by innovation.
Worryingly, the Institute’s research found only 1% of all small Irish companies consider themselves to be R&D active and 16% of medium Irish companies consider themselves to be R&D active. If we are to be truly innovative, we must improve this performance.
High taxes can reduce the incentive to innovate and the entrepreneurial spirit. What one measure does the ITI believe is the most important reform the Minister for Finance should implement this year?
There are many measures we would like to see and naturally they are all important. We also appreciate that there’s limited scope for reform of tax measures in Budget 2018. However, the Institute has been to the fore in highlighting the need for a share option remuneration regime and we welcome the promise of one in October’s budget.
At present Ireland doesn’t have a workable share option regime that allows SMEs to reward highly skilled and hard-found talented employees. Our new report shows that 38% of SMEs do not believe they can compete with larger companies when trying to recruit the best candidates.
Another big upcoming change is PAYE modernisation. What does this involve and what issues do employers need to be careful about?
Revenue is currently redesigning its PAYE regime. From January 2019, employers will be required to report PAYE information to Revenue in “real-time” i.e. each time they pay their staff as opposed to the annual update via the P35 process. This will mean additional costs for employers by way of investment in technology, staff training, updating employee data and a revision of payroll procedures.
Employers should ensure they have up to date information including PPSNs and tax credit certificates for all employees. We would like to see Revenue minimise additional compliance costs for business and to counterbalance these costs with benefits such as faster PAYE refunds. We would also welcome a common-sense approach to teething difficulties that will inevitably arise for some employers when such a fundamental new regime is introduced.
What administrative tax reforms would you like to see to assist business in the upcoming Budget 2018/Finance Act 2017?
We would like to see Revenue continuing to identify areas where taxpayer service can be improved and where the tax compliance process can be simplified to drive cost from the system to the benefit of both Revenue and the taxpayer. In doing so Revenue enhances the competitiveness of Irish businesses and further highlights Ireland as an attractive location for FDI or Irish start-ups who are deciding where to locate.
Tax compliance is particularly burdensome for smaller businesses and the introduction of additional compliance costs should be avoided as far as possible.