FANTASY BUDGET 2015

a critical analysis of three key measures of budget 2015 & one original proposed measure

Team Name: The Left Wingers

TABLE OF CONTENTS PAGE

ANALYSIS OF BUDGETARY MEASURES 2-7

Double Irish Loophole

Foreign Earnings Deduction

Universal Social Charge (USC)

PROPOSED MEASURE

Minimisation of the Black Economy 8-9

BIBLIOGRAPHY/REFERENCES 10-11

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As a nation, the Irish have become familiar with austerity and its effects, and have faced draconian financial measures introduced year-on-year by the Government, since 2008. Budget 2015 is being labelled the first anti-austerity budget in those six years. In it, the Minister, Michael Noonan TD, undertakes to:

“… support and broaden the economic recovery… targeting initiatives that will build consumer confidence, support jobs and strengthen demand

in the domestic economy”.

The following analysis outlines three specific areas of Budget 2015 and assesses its impact on the individual/family, indigenous Irish business and foreign

investment into Ireland, as appropriate. One original measure has also been prepared, bringing to focus the issue of lost revenue through the ‘black economy’ in Ireland.

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The 'Double Irish' Loophole (DI)

This loophole has allowed multinationals to channel revenues through Irish subsidiaries to a second 'Irish' (though non-resident) company, itself based in a country where less stringent corporate tax rules apply. This has enabled millions of euro to be moved offshore, virtually tax-free, slashing the tax liability of many corporations which are household names worldwide. The decision to revoke this tax loophole, which has proven contentious with the EU and USA and which has been unhelpful to our reputation in recent years, has been widely welcomed by Governments abroad.

From January 2015, new companies, setting up in Ireland, will no longer be able to avail of the DI. To coincide with the abolition of the DI, the Minister introduced The Knowledge Development Box, a tax-break which, he says, will have a more favourable tax rate levied on assets both located and managed here. Although still being discussed, it seems that a tax-incentive will be introduced on profits made from the likes of patents which will be lower than the corporation tax-rate of 12.5%.

Impact on the Individual/Family

Our research shows that in excess of 150,000 people - almost 1 in every 10 workers in the country are employed by multinationals, mainly in the technology and financial sectors. Unemployment levels are forecast to fall to 10% in 2015, from the current 11.1%. The removal of DI could lead to a decrease in employment. Large multinational employers could leave Ireland or run down their operations here, if the DI tax facility were withdrawn. In our opinion, that type of job loss could force many highly-qualified people into jobs for which they are over-qualified, reducing their disposable income and, ultimately, reducing spending. This would demand

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increased Social Welfare and other State supports, and affect forecasted unemployment levels thus increasing Government expenditure for 2015.

Impact on Indigenous Irish Business

While SMEs have a thriving export-driven sector, contributing only marginally to our overall exports, we believe that international success is a driver of domestic employment and consumer confidence at home. In our opinion, if large multinationals were to leave Ireland, the resulting effect on the supporting or dependent SMEs would cause reduced revenues and a fall in numbers employed. Large MNCs contribute directly to sectors such as the Supply, Trade and Financial Services. Reduced MNC investment in Ireland would, we feel, have far-reaching effects on the economy.

Impact on Foreign Investment into Ireland

Former Apple Chief Executive, John Scully, stated at the recent Web Summit that closing this loop-hole “…will take the edge off…” . In 2013, international companies contributed 72% of total corporation tax revenue. They spent just under €1.4 billion on R&D - 70% of the national spend. We believe that, should Ireland become less tax attractive to multinationals, it will impede economic recovery. The existing beneficiaries will be given until the end of 2020 to cease the practice, which in our opinion, will allow FDIs ample time to plan their exit strategies. However, in our estimation, the disclosures about tax arrangements, offered by the Luxembourg Government, may ease the pressure on the Government in relation to the DI issue and thus alter the format of the eventual Finance Bill.

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Foreign Earnings Deduction (FED)

The re-

introduction of the Foreign Earnings Deduction (2012) was welcomed by both foreign investors and indigenous Irish businesses. Ireland's small yet open economy relies greatly on foreign exports and inward investment for growth, especially in a post-recession climate. The FED was intended as a scheme (with a two-year life) giving the employees working overseas (including in the BRICS countries) for these companies, an income tax deduction. The scheme was to be critically reviewed to ascertain whether it should be extended after 2014.

Impact on Indigenous Irish Business

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In 2013, job commitments by Irish exporters increased by more than 20%. The government needed to support SMEs in expanding into foreign markets to generate sales and investment. In March 2014, The FED review was completed.

Twenty-two proposals to improve the policy, made by various Irish bodies and SMEs, were included- among them, a reduced number of qualifying days to be spent outside the State, an expanded list of qualifying countries and removal of the cap/extension to the income tax relief. These proposals were incorporated into Budget 2015 with the number of qualifying countries increased by fifteen, to include Japan, Singapore, Saudi Arabia and Kuwait, which were in the top 10 non-EU countries for Irish exports in 2013. The qualifying number of days was reduced from sixty to forty. Days travelling to and from the State were deemed qualifying days. This is in line with The Minister’s promise to “encourage SME expansion into foreign markets”, which, we believe, is a critical element for recovery, supporting Irish businesses and encouraging multinationals to invest in Irish trade and exports.

Impact on Foreign Investment into Ireland

Since the policy was introduced, the uptake in claiming the tax relief has been slow. Our opinion is, that this may have been the case because the list of qualifying countries was too small. Its recent increase should be welcomed. In 2013, Irish exports increased by 0.80% on 2012 (when the FED was introduced) and totalled €180 billion. However, we understand the introduction of the new facility cannot be directly connected to increased Irish exports or foreign investment, and it may take time before any correlation can be made.

In the expansion of the Irish export market, in our opinion, the FED policy is a move in the right direction, encouraging foreign trade and investment. Irish exports increased in value by €2b from 2012 to 2013. The cost of The FED was estimated at €1m in that period – which we believe is a small investment for a (possible) large return.

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Universal Social Charge

Universal Social Charge (USC) has seen an extensive modification in Budget 2015. Changes in its application was one of the most anticipated reforms of the budget. This unpopular charge was introduced-initially- as an emergency tax in January 2011 and has since remained a huge and unpopular burden on lower and middle income-earners, affecting families by a reduction in take home pay.

The table below shows the revised thresholds and rates, effective January next:

2014 Threshold 2014 Rate 2015 Threshold 2015 RateIncome up to €10,036

2% Income up to €12,012

1.5%

Income from €10,036.01 - €16,016

4% Income from €12,012.01 - €17,576

3.5%

Income above €16,016

7% Income from €17,576.01 - €70,044

7%

Income above €70,044

8%

Self-Employed Persons’ with income over €100,000

10% Self-Employed Persons’ with income over €100,000

11%

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Impact on the Individual/Family

The increase in the entry point, from €10,036 to €12,012, will remove approximately 80,000 low-income workers from the charge, altogether. These individuals will benefit from an increased gain of €1,976 income exempt from USC. This reform is long over-due. It is our opinion that persons who earn a substantially low income, for example, below €12,000, should have been exempt from the charge, since its implementation in 2011.

The reduction in 2014 rates to 1.5% and 3.5% respectively, will have a profound effect on persons liable within these brackets. We believe the new higher income thresholds, in combination with the new rates of USC, will be favourable to those on lower and middle salaries thereby increasing take-home pay. However, boosting disposable income is not the only gain. We agree that the reconstruction of USC rates, at the lower and middle levels, has made it more desirable for persons to remain in employment.

The 'sting in the tail' was the new 8% rate for incomes in excess of €70,044 and self-employed income over €100,000 now levied at 11%, up from 10%. Both these increases will limit gains for high-income earners. As a group, we have formed the opinion that these reforms are vital to reducing Ireland’s deficit, which remains the focus of government reform.

Individuals affected will, no doubt, be dissatisfied and may feel 'targeted'. Nonetheless, with an estimated €350m in revenue to be generated from those with incomes over €70,044 (USC rate of 8%), we stand by the

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government’s decision to increase this particular rate. The amended USC rates, at the lower and middle income scale, should address earlier criticism that the charge at the high rate was targeted at too low an income.

Impact on Indigenous Irish Business

Changes to the application of USC will prove beneficial to the individual, as stated above. This, in turn, will affect Irish businesses in a positive manner. Persons within employment will relish the lower rates of USC and remain at work. We believe the knock-on-effect for businesses will be to help improve staff-turnover while reducing hiring and training costs. SMEs can then invest money, saved as a result, into various business improvements.

New Proposed Measure: Minimisation of the Black Economy

We have considered Budget 2015, and acknowledge the attempts made by the Government to aid national economic recovery. Our proposal could prove beneficial to this recovery, by attempting to 'choke' the 'Black Economy'. There is an estimated €20bn (12.8% of GDP in 2012) lost per annum through undeclared cash payments, ‘nixers’ and payments to employees ‘off the books’. We propose an online system, managed by Revenue, of Registered and Vat-compliant tradesmen. Homeowners would avail of VAT relief on improvement and repair work carried out by these tradesmen. We are aware that the existing tax credit and its extension to include rental properties already reward homeowners. However, we believe that our policy would complement the existing policy, whilst also rewarding those who spend less and do not qualify for the tax credit.

Total Bill (Exclusive of VAT)

VAT Relief Amount (%)

Estimated VAT Relief Amount (%)

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€250 - €4404 5.5% €14- €242€4405-€9999 3.5% €154- €350€10000-€20000 1.5% €150- €300

We suggest VAT relief for consumers who employ Revenue-registered traders, as follows:

This scheme would increase the number of legitimate and tax-compliant tradesmen in the construction sector. Our proposal would help reduce unemployment - at 6.4% as of October 2014 - by discouraging consumers from employing tradesmen who cannot offer the VAT-relief facility and who may be trading, earning undeclared income and claiming Dept. of Social Protection payment (DSP) benefits. Our proposal presents a 'dual benefits package' to both the tradesmen and consumer.

Although consumers would not receive a monetary payment, they would receive a discount on VAT payable, thus reducing their outlay. We plan to cap the amount on which the VAT- relief is available, at €20,000 and have a qualifying expenditure of €250. Anything above this would then be charged at the full VAT rate. We believe the accumulated relief for consumers, undertaking home repairs and improvements would be significant.

We are aware that this scheme would, on implementation, result in a temporary loss of VAT revenue. However, market-place competition and consumer demand would, we believe, force tradesmen, who are claiming DSP benefits, to 'sign off' and register with Revenue- if they wished to remain viable in this market-place. In turn, this would lead to reduced DSP outlay, greater disclosure of trading income, a broadened income tax base and greater tax revenues. Our hope is, that this new system would lead to a marked increase in the number of registered traders, a more skilled labour force producing better quality results for the consumer and a significant reduction in the 'Black Economy'.

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We would propose to introduce this scheme for a period (to be decided) until revenue, lost through the 'Black Economy', is 'clawed' back, as we are aware that trying to eradicate it is unrealistic, at this time. When an optimum balance is reached, we would propose a phase-out scheme, so as not to financially depress revenue, long-term. This new proposed measure, if implemented, could be a contributing factor in reducing the overall deficit.

References/Bibliography

Beesley, A. (2014) ‘Budget to end ‘double Irish’ tax scheme’, Business + Your Money, The Irish Times, 14th Oct, 1.

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Beesley, A.,Taylor, C. (2014) ‘Pharmaceutical firms lobby over ‘double Irish’ tax’, Business This Week, The Irish Times, 19th Oct, 1.

Budget Ireland, (2014). ‘Review of the Foreign Earnings Deduction’, [online], available: http://www.budget.gov.ie/Budgets/2015/Documents/FED_Report_Oct14_final.pdf [accessed 3 November 2014]

Citizens Information, (2014).‘Budget 2015’, [online], available: http://www.citizensinformation.ie/en/money_and_tax/budget_2015.html [accessed 29 October 2014]

Central Statistics Office (2014)’ Employment and Unemployment (ILO) 000s’ [online], available: http://www.cso.ie/en/statistics/labourmarket/principalstatistics/ [accessed 6th Nov 2014].

Forfas (2013) ‘Irelands Construction Sector: Outlook and Strategic Plan 2015’ [online], available: http://www.forfas.ie/media/19072013-Irelands_Construction_Sector-Publication.pdf [accessed 4th Nov 2014].

Houses of the Oireachtas, (2014).’The Budget 2015’, [online], available:http://www.oireachtas.ie/viewdoc.asp?DocID=27398&&CatID=118 [accessed 17th Oct].

Irish Tax Institute (2014). ‘Budget 2015 Submission, a Strategy for Growth’. [online], available: http://www.taxinstitute.ie/Portals/0/Tax%20Policy/Institute%20Submission/2014/Irish%20Tax%20Institute%20Pre-Budget%202015%20submission.pdf [accessed 29 October 2014]

Irish Tax Institute (2014). ‘Budget 2015 Submission, a Strategy for Growth’. [online], available: http://www.taxinstitute.ie/Portals/0/Tax%20Policy/Institute%20Submission/2014/Irish%20Tax%20Institute%20Pre-Budget%202015%20submission.pdf [accessed 29 October 2014]

Kelpie, C. (2014) ’OECD gives cautious welcome to Knowledge Box tax scheme’, Business Week, Irish Independent, 23 October, 1.

KPMG,(2014). ‘Foreign Earnings Deduction (FED) Factsheet’. [online], available: https://www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Documents/expanding-into-new-markets/BRICS-FED-Factsheet-Aug12.pdf [accessed 3 November 2014]

McBride, L. (2014) ‘Are you richer or poorer under the election budget?’, Irish Independent 12th Nov, available: http://www.independent.ie/business/budget/are-you-richer-or-poorer-under-the-election-budget-30674505.html [accessed 16th Oct].

O’Brien, C. (2014) ‘Adapting to a changing International tax landscape’, Budget 2015, The Sunday Business Post, 19th October.

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Revenue Ireland. (2014) ‘Budget Summary 2015’, [online], available: http://www.revenue.ie/en/press/budget/index.html [accessed 28 October 2014]

Sheahan, F. (2014) ‘Noonan dangles the carrots-but will voters be enticed? , Irish Independent, 15th Oct, 4-5.

Society of Chartered Surveyors Ireland (2012) ’The Irish Construction Industry in 2012’ [online], available: http://www.scsi.ie/constr2012 [accessed 5th Nov 2014].

Walsh, J. (2013) ‘Business Shadow Economy costing the State €20bn a year’ [online], available: http://www.irishexaminer.com/ireland/business-shadow-economy-costing-state-20bn-a-year-230569.html [accessed 9th Nov]

Weston, C. (2014) ‘Workers gain in changes’, Budget 2015, Irish Independent, 15th Oct, 28-29.

Weston, C. (2014) ‘Tax experts tell Noonan USC cut ‘best for workers’’, Irish Independent 25th Aug, available : http://www.independent.ie/irish-news/tax-experts-tell-noonan-usc-cut-best-for-workers-30533643.html [accessed 6th Nov].

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