BUDGET REACTION: FOR MANY months the Government has promised harsh measures to trim a targeted €4 billion off the budget deficit next year, with a significant focus on spending cuts rather than revenue raisers. The Minister has broadly delivered on these expectations, writes COLM KELLY
As regards taxation, the Minister remained more or less true to his word that there would be no new taxes, with the significant albeit well-flagged exception of a new carbon tax. There is to be no increase in levies, PRSI or tax rates and no changes to tax credits, allowances or rate bands. But the minimum effective rate for high earners who benefit significantly from tax reliefs will increase from 20 per cent to 30 per cent in 2010.
There will be significant though not unexpected change on the pension front. The Minister has accepted the Commission on Taxation recommendation that pension lump sums below €200,000 should not be taxed. However, he has stated that the tax treatment of sums above that level, and indeed the treatment of tax relief on pension contributions, will be considered in the Government’s National Pension Framework to be published shortly. The expectation is that pension lump sums over €200,000 will become taxable at the standard rate and that tax relief on personal pension contributions will be at a hybrid rate of 33 per cent.
The Minister has addressed the contentious issue of cross-Border shopping by announcing that the standard rate of VAT will reduce to 21 per cent with effect from January 1st, 2010 and by reducing excise duty on alcohol. The Minister’s case has been helped by the increase in the UK VAT rate to 17.5 per cent from January 1st, 2010, which was confirmed in the pre-budget report presented by British chancellor Alistair Darling.
The Minister has responded to pressure from a number of sources to seek a meaningful contribution to the exchequer from tax exiles. It is proposed that high net worth tax exiles contribute a minimum of €200,000 tax per year.
This measure will apply to individuals domiciled but not tax resident in Ireland, and who have income in excess of €1 million and Irish assets of more than €5 million.
Details on the new carbon tax were provided. Following the polluter-pays principle, the tax will see immediate increases in fuel prices for petrol and diesel. The carbon tax is to be levied at the rate of €15 per tonne, and is expected to raise some €330 million a year.
The Minister has signalled his intention to introduce in 2011 a universal social contribution to replace PRSI, the health levy and the income levy. Interestingly he also commented that our income tax system is imbalanced, with half of earners outside the tax net, half of all tax paid by just 4 per cent of earners, and suggested that this imbalance must change. We can also expect to see more details on a property tax and water rates in next year’s budget.
On the business front, the Minister emphasised the sustained commitment to the 12.5 per cent rate, and to a pro-enterprise tax policy. He leaves the door open to further enhancements of the tax regime applying to research and development and to intellectual property.
As the global economy restructures itself, the Minister rightly emphasised the significance of the opportunities emerging for Ireland Inc to act as a high-value platform for regional hubs in international services, financial services and asset management. A significant weakness in our offering in this regard is the tax treatment of mobile international executives, and this was not referred to by the Minister – one hopes that this will be a matter for attention sooner rather than later.
The Minister largely did what he said he would do, and flagged some further changes to come in a number of key areas. The emphasis on tax policy to foster and facilitate enterprise and employment creation is a welcome and necessary prelude to Ireland galvanising itself to take advantage of a recovering global economy.
Colm Kelly is senior tax partner with PwC Tax and Legal Services
