Policies will need to reflect demands of a changed world

Wed, Oct 15, 2008, 01:00

COMMENT:Measures to balance the books will not be enough to ensure the economy bounces back, writes COLM KELLY

BOLD STEPS have been necessary in recent times to stave off the most serious financial crisis facing the global and local economies in decades. Radical measures seeking to stabilise the financial system and a rapid deterioration in the public finances provided a demanding backdrop for Brian Lenihan's first Budget as Minister for Finance. The Minister began by stating his intention to raise an additional €2 billion in taxes next year.

For individuals, he introduced an income tax levy of 1 per cent on the first €100,100 of income and 2 per cent thereafter, and widened the standard rate band by €1,000 for a single person and €2,000 for a married couple with two incomes.

For first-time buyers, the Minister increased the rate at which tax relief is available for mortgage interest in the first five years. This is being funded by a reduction in the mortgage interest relief available for non-first-time buyers to 15 per cent.

In a surprise move, the rate of Deposit Interest Retention Tax (Dirt) was increased from 20 per cent to 23 per cent on regular deposits and to 26 per cent on certain other savings products.

The Minister reduced the annual earnings limit for tax relief on pension contributions from €275,239 to €150,000. This represents a very significant change and, when combined with the scale of the losses being borne by most pension schemes over the past 10 months, means businesses and individuals alike will need to review their pension positions urgently.

Mr Lenihan also introduced a local authority charge on non-principal private residences of €200 per dwelling with effect from 2009. This will affect landlords and owners of second homes.

In a welcome move for business, the RD tax credit was increased from 20 per cent to 25 per cent, with the Minister also committing to keep this area under review. He announced that companies commencing business in 2009 would be exempt from corporate and capital gains tax in each of the first three years, to the extent that their tax liability in the year does not exceed €40,000. This measure is subject to review from a State aid perspective.

In a move to accelerate cash-flow, the Minister announced changes in preliminary tax payments for large companies who will now be expected to pay their first instalment of preliminary tax in the sixth month of their accounting period. This will place increased pressure on companies to calculate accurately their corporation tax bills long before the end of their accounting period.

There was much speculation and debate in advance of the Budget in relation to what measures the Minister could introduce to boost the slowing property market. On the commercial property side, the top rate of stamp duty was reduced from 9 per cent to 6 per cent. However, the general Capital Gains Tax rate was increased from 20 per cent to 22 per cent.

On the environmental front, the Minister introduced measures in relation to benefit-in-kind for company cars to be calculated on the basis of carbon dioxide emissions. The Minister also signalled the widening of the range of energy-efficient equipment on which accelerated capital allowances would be available.

A levy of €200 on employer-provided car parking in urban areas was introduced and motor taxes were also increased by 4 per cent or 5 per cent, depending on engine size and carbon band.

Importantly, the standard rate of VAT was increased from 21 per cent to 21.5 per cent.

The Minister took steps to begin to balance the books. Ireland Inc's future will equally depend on the ability of our economy to bounce back from the current setbacks and to continue to develop the role we can play in the international economy generally.

The Minister's commitment to keep issues such as the tax treatment of intellectual property and RD credits firmly on the agenda is not just welcome, it is essential. Most critically of all, our 12.5 per cent corporation tax rate is "not for changing upwards" (this leaves open the possibility of a downward change).

We will almost certainly be leaner as we come through the current difficult period, and we must be ready to compete in what is likely to be quite a different world. The public and private sectors have successfully worked closely together in the past to respond to serious challenges - such a co-ordinated response will be urgently required in the coming period. Ireland's fiscal and economic policies will need to quickly reflect the demands of a changed world. Ireland Inc has much work to do.

• Colm Kelly is senior tax partner at PricewaterhouseCoopers