Business Taxation
Corporation Tax
This Government will ensure that our corporation taxation policy acts as a stimulant and not as an impediment to economic growth. It is for that reason that we have announced a single corporation tax rate of 121/2 per cent and cleared this with the EU Commission under State Aids rules of the Treaty.
There is nothing discriminatory about this policy. Ireland will remain attractive to foreign investors, not because we will discriminate in their favour, but rather because we will remain attractive to all investors.
We should make no mistake about the extent to which our economic success is a product of a broad set of policies including taxation designed to stimulate growth and the creation of wealth. It is a policy that has been successfully and consistently followed by successive Governments.
Notwithstanding our confidence, we must be on our guard against any threat to our ability to sustain this growth. We must ensure that the concept of harmonising taxes does not become simply a means of increasing them. Our policy in this regard is fundamental to our economic success. In the past, high levels of taxation led to higher unemployment, no economic growth and mountainous national debt.
It was only when Ireland moved away from this nonsensical policy that we began to see higher growth, more employment and less unemployment, and reducing national debt.
The agreement arrived at with the EU Commission last July clears the way for the introduction of a single rate of corporation tax on trading income of 121/2 per cent from January 1st, 2003, along with a rate of 25 per cent on non-trading income. It is appropriate following this that the Government should set out now a programme of reductions in the standard rate of corporation tax for the next five years to achieve the 121/2 per cent rate. Accordingly, the standard rate will be reduced from 32 per cent to 28 per cent to take effect from January 1st, 1999. The existing 25 per cent rate will remain unchanged but will now apply to the first £100,000 of profits instead of the first £50,000 of profits as is currently the position. The full year cost of these changes is £132 million.
It is proposed to reduce the standard rate of corporation tax for trading income by 4 per cent per annum for the years 2000, 2001 and 2002 and by 31/2 per cent for 2003, giving a 121/2 per cent rate in 2003. The lower rate on the first £100,000 of profits will be merged with the standard rate at the appropriate time and reduced thereafter in tandem with the standard rate. In order to provide certainty for the business sector, the Summary of 1999 Budget Measures sets out the categories of passive income that will fall to be taxed in the future as non-trading income at the 25 per cent rate. The 1999 Finance Bill will provide for the necessary legal definitions. This 25 per cent rate will apply to all non-trading income of companies for the year 2000 and onwards.
Clawbacks
The reduction in the standard rate of corporation tax is being made at a time when the business sector is experiencing significantly increased profits. The Government is anxious that businesses and owners of capital should continue to make a reasonable contribution to the cost of providing Government services - many of which directly benefit those businesses themselves. For that reason, the Government will continue to look at the scope for clawbacks from the corporate sector and will examine carefully all tax reliefs and allowances which can be regarded as business reliefs, cutting back on those where necessary.
Employers PRSI
No other sector is having a tax reduction programme underwritten for it by Government in the way that I have just set out. The Government believes it right in these circumstances that the ceiling on the 12 per cent employer PRSI rate should be increased to £35,000 from the figure of £30,500 already provided for in the Abridged Estimates Volume. This will bring in £37 million in a full year. The threshold below which the lower 81/2 per cent employer PRSI rate applies will be increased from £14,040 to £14,560 per annum at a full year cost of £13 million. The net effect of both changes is a yield of £24 million to the State - not a very heavy burden to the corporate sector.
Withholding Tax on Dividends paid to Individuals
Since owners of capital in the form of shares will benefit from the reduced corporation tax rate on profits, I believe it right that the Government should accordingly take action to ensure that the tax due on dividends is paid to the Exchequer. The existing tax credit on dividends will be abolished on and from April 6th next under measures taken in my first Budget. In effect, this means that after April 5th the onus of the payment of tax on dividends received by individuals will rest on self-assessment and income declaration by shareholders. I propose, therefore, to introduce on and from April 6th, 1999, a withholding tax at the standard rate of income tax on dividends paid to individuals resident in the State and certain non-residents. This tax will have to be deducted from dividends before they are paid out.
Those individual shareholders liable to tax at the higher rate will be required as before to declare their dividend income in their tax returns and to pay the balance of income tax due to the Exchequer. The proposed system is explained fully in the Summary of 1999 Budget Measures. It is estimated that the extra yield from the operation of this withholding system will be £15 million in a full year.
Surcharge on Undistributed Corporate Income
The Government will continue to examine such other measures as may be needed to seek a balanced contribution to the national Exchequer from all sectors of the economy. This also includes the extension of the current surcharge on undistributed corporate income of certain closely held companies. While the needs of business for retained profits to fund investment are readily acknowledged, this will have to be balanced by concern that corporate structures can be used to shelter income at low rates of tax while postponing its distribution to shareholders. The need for such surcharges will become more immediate as the standard rate of corporation tax approaches 121/2 per cent. There will be consultation with business and other sectors before any extension of the current surcharge system is put into effect.
Irish Registered Non-Resident Companies
The problems arising from the use of Irish registered non-resident companies for various unlawful activities has been a cause of concern to the Government for some time. I am pleased to say that a package of measures under company law and tax law to deal effectively with this problem is now close to finalisation. The package will be submitted to the Government shortly so that it can be announced with the publication of the Companies (Amendment) Bill in the next few weeks.
Retirement Pensions for the Self-Employed
During the course of last year's Budget speech and during the Dail debate on the Finance Bill 1998, I signalled my clear intention to make changes in the area of pensions for the self-employed.
It is my intention to bring forward in the next Finance Bill significant changes to the present system to take effect from April 6th next. The changes I plan will be grounded on the following principles:
(a) the self-employed person will not be restricted to the one option on retirement of investing his or her accumulated pension fund net of the tax-free lump sum into a traditional type annuity;
(b) the self-employed person will have the option of retaining ownership at all times of the capital sum invested on his or her retirement to provide a retirement income;
(c) the self-employed person will also have the option of retaining ownership at all times of the market value of the accumulating fund during the contribution period; and
(d) the limits on tax-relieved contributions to be increased substantially from 15 per cent to 30 per cent on a sliding scale basis relating to age, as detailed in the Summary of 1999 Budget Measures.
I see these principles as forming an integrated package.
There will be appropriate consultation with the Pensions Board and other expert bodies prior to finalising proposals for the Finance Bill. In the context of the increased contribution limits, it will also be necessary to examine the question of an earnings ceiling. The cost of the increase in self-employed pension contribution limits is estimated at £18 million in a full year.
Extension of Deadlines for Various Designated Area Schemes
In response to representations received from various parts of the country I have decided to extend the existing termination dates for the various designated area tax relief schemes and for the transitional arrangements under the Finance No 2 Act, 1998 dealing with newly-constructed rental property. Full details are set out in the Summary of 1999 Budget Measures.
Rural Renewal Scheme
As the House will be aware, I introduced tax incentives for a new pilot rural renewal scheme for the Upper Shannon Area earlier this year. The residential incentives have been in operation since June 1st last and I am awaiting clearance from the EU Commission for the business tax incentives. When this clearance is given, I will look at the possibility of extending this pilot scheme on a targeted basis to other rural areas.
Relief for the Provision of Student Accommodation
Since July 1992, the special tax relief for the provision of rented residential accommodation has applied only in urban renewal and other designated areas. I have decided to extend the scope of this scheme beyond these special areas for a limited period to encourage the provision of third level student residences, preferably located on or near the third-level campus. The details will be contained in the Finance Bill.
New Tax Relief for Convalescent Facilities
I am proposing that the incentive capital allowance regime for nursing homes will be extended to the provision of convalescent health-care facilities. The provision of such facilities is aimed at reducing the hospital waiting lists by providing short-stay facilities for patients to stay in after operations or intensive hospital treatment. Further details are set out in the Summary of Budget Measures.
Farmer Taxation
I am extending the present stock relief arrangements for farmers for a further two years to April 5th, 2001. These arrangements are a general relief of 25 per cent and a special incentive relief of 100 per cent for certain young trained farmers.
In the case of VAT, the flat rate of VAT which may be charged by unregistered farmers on their sales to registered traders will be increased from 3.6 per cent to 4.0 per cent from March 1st, 1999, at a cost to the Exchequer in 1999 of just over £7 million and nearly £11 million in a full year. The associated VAT rate for livestock will also increase to 4 per cent from the same date.
Capital Acquisitions Tax
At present, under capital acquisitions tax rules, all gifts and inheritances taken since June 2nd, 1982, are aggregated for the purposes of arriving at the rate of tax for a current gift or inheritance. I now propose that for gifts and inheritances taken on or after today, only those previous gifts and inheritances taken since December 2nd, 1988, will be taken into consideration for tax purposes. Bringing forward the date for aggregation in this way will ease the burden of compliance for both the taxpayer and the Revenue Commissioners.
I am also increasing from January 1st next the annual small gifts exemption limit from £500 to £1,000. This limit was last increased in 1978. The cost of these changes is estimated at just over £6 million in a full year.