Your Take on Tax

Your Take on Tax

Various Forms of Taxation

Individuals

Before proceeding, we must identify an important distinction that exists between the taxes which individuals pay. Direct taxes are levied on income. Indirect taxation is levied on spending, with the most obvious example being VAT on goods. We will firstly focus on direct taxation on individuals.

The most basic tax paid by all people in employment is income tax. This can be subdivided into schedules, according to the source of the income. For people in regular employment, PAYE tax is paid on their income. In Ireland, we have a progressive taxation system. The basic underlying aim of such a regime is that those who earn more, pay a greater proportion of their income in taxation. This scheme is structured by way of tax bands, whereby all income up to the recently raised threshold of €33,800 is taxed at the rate of 20%, while income in excess of that is subject to a rate of 40%.

In addition to the basic income tax, the Irish Government imposes two additional de facto forms of taxation. Pay Related Social Insurance is levied in order to contribute to social welfare services and pensions, while the divisive Universal Social Charge is an additional income tax levy.

Capital Gains Tax is levied on profits made on investments, such as the sale by an individual of shares in a company. Individuals receive an annual exemption on the first €1,270 of capital gains (a conversion of the original £1,000 rate), while additional gains are taxed at 33%.

Capital Acquisitions Tax is applied on gifts and inheritances. The tax-free threshold is determined by your relationship with the testator/donor. Additional reliefs exist for the transfer of agricultural holdings. The favourable scheme for agricultural land is to ensure that the beneficiary is not forced to sell a portion of a modest holding in order to pay tax.

Recent developments, notably in The Finance Act 2013, place taxes on residential properties. These can be divided into local property taxes and second home taxes for people with non-principal private residences. The aim of the former is to fund local services, while the latter is a form of taxation on wealth.

The most prominent indirect form of taxation is Value Added Tax. The indirect distinction arises as it is dependent on spending. There are several different rates which apply. Many consumer goods are subject to the higher 23% rate of VAT, while the hospitality industry has, in recent years, been granted a far lower 9% rate in order to foster affordable tourism and to relieve the economic difficulties faced by the sector. Several consumer goods are exempt from VAT for social reasons, with the most obvious examples being children’s clothing and basic food supplies.

Excise duty is a levied rate of tax on goods in order to dissuade consumption and to discourage poor consumer choices. These duties apply most visibly to tobacco and alcohol.

Corporations

Unsurprisingly, corporation tax is applied to the profits earned by businesses, and applies at a rate of 12.5%. Ireland’s rate is exceptionally low, and many other EU Member States apply a rate in excess of 30%. This serves to make Ireland a particularly desirable place for multinationals to locate their European headquarters, as it provides them with unrestricted access to the European Union.

Import duties apply when goods pass a frontier into Ireland. However, as alluded to above, a primary aim of European integration is the creation of the free market. This means that it is incompatible with Treaty provisions, which have been mandated by member states, for a State to apply duties to products which are traded within the Union. However the duty applies to imports from outside the Union, and serves to make imports less competitive with domestic products competing in the same market.

Like consumers, corporations must also pay VAT on goods. It is paid on the value added at each stage of production.

Tax that benefits the economy

Excise duty is a tax placed on certain goods which are perceived as damaging to the consumer or society at large. The aim of this form of taxation is, in our opinion, twofold. Firstly, the duty normally constitutes a large percentage of the overall cost of the good. This makes the product more expensive for the consumer and basic economic theory indicates that if a good is more expensive, then consumers will demand less of the product. How much less is demanded depends on the price elasticity of the product in question. Unsurprisingly, addictive products such as cigarettes tend to be inelastic as people are willing to pay more to satisfy the addiction, but empirically an increase in price does cause consumption to decrease, even if not in proportion to the price increase. This goes some way to achieving what is the overall aim of the measure – to discourage consumption by requiring people to pay more for the harmful product.

This view has been expressed by Minister for Health Leo Varadkar in the recent 2015 budget, where he affirmed that “Ireland needs to change its damaging attitude towards alcohol”. What we find particularly cogent about this aim of the duty is that it serves as a particular deterrence for young people. Generally speaking, youths have less discretionary expenditure, so a hike in the price of a particular harmful product such as cigarettes affects young people more acutely and it logically follows that this means that they are more likely to cease, or reduce consumption of the harmful product due to economic necessity.

The second limb of the aims of excise duty is to negate the social harm caused by the product in question. Damage caused by cigarettes and alcohol to public health cost the Health Service Executive in the region of five billion euro per annum. In order to recuperate this enormous expenditure, the government needs to impose heavy duties, which will at least go some way towards offsetting the expense and pressure placed on the health system.

While we recognise that the source of the excise duty revenue is inherently negative, in that it comes from either socially damaging consumption tendencies, such as alcohol and tobacco, or environmentally damaging consumption such as the utilisation of hydrocarbons, the duty goes to offset the negative consequences of the activity.

In conclusion, the revenue raised from the duty funds healthcare, education, and other crucial social projects which benefit society. The revenue which contributes to healthcare serves to directly offset the damage caused by harmful consumption habits. Significantly, the contribution to education can be a powerful tool in ensuring that the next generation of consumers are dissuaded from making poor consumption choices regarding similar products.

Tax Relief Which Reduce Tax Burden

While taxes are necessary to stimulate economic growth through government spending, excessive taxation can act as a brake on the economy, especially by dissuading investment by companies. Therefore, it is crucial that the legislature devises schemes which reward companies which invest heavily in innovation. As such, the government offers reliefs to lower the taxes of both corporations, to encourage investment, and individuals, to encourage consumption. One of the key tax reliefs that our team has encountered which is utilised by the state to encourage investment is the Research and Development Tax credit, the rules for which are governed by the Taxes Consolidation Act 1997 and the Finance Act 2012. This credit allows companies to offset 25% of any research and development expenditure against their corporate tax obligations, subject to calculation against the base year 2003. This credit applies across corporate groups, allowing large corporations to benefit from investment in research and development made by subsidiaries.

This tax credit offers a number of benefits to both corporations and the Irish Economy as a whole. The credit allows corporations to reduce their tax burden through encouraging them to invest, leading to greater profits for the corporations themselves in the future. As such, the credit acts as a considerable incentive to invest, stimulating growth both for the corporation and the country.

The tax credit also offers considerable benefits for the Irish economy by encouraging investment in research and development. This increased investment will help to stimulate economic growth and result in more high value employment in areas such as research and science. This increase in employment will benefit the exchequer as tax intake rises and unemployment falls. Furthermore, the increase in investment in research and development makes Ireland a more attractive location for investment, as corporations are attracted by the credit itself, and by the high quality research personnel and facilities that are created as companies invest due to the credit.

The tax credit also acts as a method for the improvement of university facilities as it incentivises the outsourcing of research to universities. Although the credit is mainly only available to in house research, credit of 5% or €100,000 is available for research outsourced to Irish universities. This means the credit also acts as a catalyst for the improvement of universities and educational institutions in Ireland.

Finally, successful research which leads to the creation of intellectual property is essential for business expansion. For example, pharmaceutical companies are dependent on continuing advancement and the development of new products in order to ensure they maintain their position in the market. These developments in turn lead to the creation of manufacturing jobs once the discovery has been worked into a marketable product. Incentivising innovation, therefore, is of paramount importance in ensuring that corporations have viable products to continue satisfying the needs of the market in future.

Why a Career in Tax is Desirable

What initially struck us about the area of taxation is the uniquely challenging regulatory environment. Tax is completely governed by statute and this means that a tax expert needs to carefully interpret and construe legislation. The different areas of direct and indirect taxation are contained in a range of legislation and so an in-depth knowledge and appreciation of the law is paramount to a successful career in taxation. By its very nature tax specialists deal with mathematics and figures on a daily basis. We feel our background in both law and economics uniquely equips us to deal with an area that is an obvious intersection of the two.

Initially, we did not consider the global possibilities of a career in taxation. However, the careerintaxwebsite highlights the importance of tax experts in the modern global economy. As labour and capital become ever more mobile we feel confident that the importance of the role within multinational organisations is only going to grow. Both of us have a huge desire to experience different countries and cultures, which is exemplified by the fact that the two of us have secured the opportunity to study abroad for the next academic year. Crucially, the world financial centres are located in some of the most vibrant and dynamic cities in the world. From Sydney to Singapore, the options for an expert in the area of taxation are truly without frontier.

Another attractive element of the skillset is its undoubtedly universal applicability in the modern world. The old adage that the only guarantees in life are death and taxes rings true, and every individual and company needs an operating knowledge of the area of taxation. Thus, the skills of a tax practitioner are always in demand and given the variety of clients with which a specialist can deal, each day presents a new and unique set of challenges.