Tax strategy papers: the key highlights

The Government’s high-level tax strategy group has released its annual batch of papers, aimed at informing budgetary policy. Here’s ten highlights.

Income tax

The group considered and costed Taoiseach Leo Varadkar’s pledge to lift the threshold at which workers pay the higher 40 per cent rate of income tax. It currently kicks in at incomes above €35,300, Varadkar wants to raise this to €50,000, albeit on a phased basis over five years, in a bid to ease the tax burden on low and middle income workers, which is seen as high by international standards.

The tax strategy group says this would cost €2.3 billion if implemented in one year. If done in stages, it said that a €3,000 increase to all standard rate bands in one year would cost €524 million in the first year, and €610 million in a full year.

Merging USC and PRSI

The Government has promised to merge the universal social charge (USC) and pay-related social insurance (PRSI) in a bid to simplify the tax code. However, the tax strategy group says this would be an extremely complex undertaking, involving a trade-off between a simple design, a loss of revenue to the State and losses and gains for taxpayers.

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Separately it suggested that the current PRSI (social insurance) regime was lower than in other countries and that consideration should be given to raising contribution rates over a five- to 10-year period, with annual increases of a quarter or a half percentage point.

It also suggested that raising the threshold for the higher 4.5 per cent rate of USC could be used to ease the tax burden on low to middle-income earners.

Carbon tax and fuel prices

The Government’s green credentials were called into question last year after it left the carbon tax rate unchanged at €20 per tonne in the budget. It has, however, promised to raise this to €80 per tonne by 2030 as part of its climate action plan.

The tax strategy group said increasing carbon tax to €80 would add 17.2 cent per litre of petrol and 19.65 cent per litre of diesel. It would also add about €138 to the average annual gas bill and €156 to the average annual home heating oil bill.

The group suggested additional carbon tax revenues should be ring-fenced for the purposes of enhancing the current Sustainable Energy Authority of Ireland grant scheme for household energy efficiency improvements and to fund sustainable transport infrastructure.

Motor tax

The group also proposed changes to the motor tax regime, including increasing the number tax bands for Vehicle Registration Tax (VRT) from 11 to 14 and changing the rates.

The lowest rate could drop to 7 per cent for cars with emissions below 50g/km, rising to 39 per cent for cars with emissions over 200g/km.

The recently introduced 1 per cent diesel surcharge would be replaced by a new levy set against a vehicle’s Nitrogen Oxide (NOx) emissions. The group also considers the removal of the current €1,500 tax relief on conventional hybrids and €2,500 relief on plug-in hybrids.

It makes the case that if these were removed these vehicles should still benefit from the reduced lower VRT rates.

The €5,000 tax relief on fully-electric cars could also only apply on cars up to €40,000. After that it would taper off steeply, with no relief for vehicles costing €50,000 or more.

Commercial stamp duty

Consideration should also be given to further increasing the rate of commercial stamp duty, the group said. Minister for Finance Paschal Donohoe controversially trebled it to 6 per cent in Budget 2018.

Concern that this would dampen investment in the commercial property sector have proved unfounded, the group said, while suggesting a further 1 per cent hike could raise another €94 million in annual revenue for the exchequer.

Food supplements

Food supplements, which amounted to a €60 million market in 2016, according to Revenue, are also likely to come under the VAT regime in the October budget with the tax strategy group suggesting there is no legal basis in the EU to zero rate such supplements as has been done in Ireland for many years.

It said, however, that certain foods for specific groups, such as baby milk formula, as well as folic acid and other vitamins and minerals classified as medicines, and fortified foods, are unlikely to be affected by any change in the tax treatment for supplements.

Capital Gains Tax (CGT) relief

The group also considered the cost to the exchequer of increasing the limit on the relief offered to entrepreneurs selling their businesses to €15 million, which was put at €84 million.

The relief, introduced in the 2015 Finance Act, means capital gains tax is charged at a discounted 10 per cent rate on any profits from the disposal of certain business assets up to a lifetime limit of €1 million.

There have been continuing calls over recent years for the limit to be raised. As part of a recent consultation process, submissions called for the lifetime limit to be raised to €5 million, €10 million or €15 million, either immediately or on a phased basis.

Taxing property funds and corporation tax

The tax strategy group also tackled two controversial issues central to the Irish economy, namely the how much tax is being paid by property funds – Reits, Irish Real Estate Funds (Irefs) and so-called Section 110 vehicles – and corporation tax, albeit without recommending any major change to the tax code in either area.

Minister for Finance Paschal Donohoe had asked the group to look at how property funds operated here amid concern they were crowding out potential home buyers.

Apart from noting that the dividends paid by Reits to their shareholders rose tenfold to €93.5 million in the four years to 2018, it makes no recommendations on how these entities could be taxed.

Amid concern the tide may soon go out on the State’s €10 billion corporation tax bonanza, the group simply noted the highly concentrated nature of the tax base again without recommending any change.