Fantasy Budget Competition

Fantasy Budget Competition Due date: 4 th November 2013 Dean Bracken Sean Feely Conor Lunney David McNamara

Introduction The budget for 2014 announced on the 15 th of October 2013 promotes growth while raising necessary revenues in our opinion. The aim of the budget is to bring the deficit to 4.8%. The vision of the budget has shifted from a narrow focus on cutting the deficit in the public finances to a more measured approach that puts more emphasis on nurturing growth with the aim of growing the economy by 2%. We agree with the sentiment of Helen O Sullivan, President of the Irish Tax Institute, that the measures announced ensure that not only is Ireland a good country in which to do business but a good place in which to start a business, with many tax measures to encourage start ups. Such measures include a new CGT cut, a VAT Cash Receipts measure, the new R&D Tax Credit measure, a Start Your Own Business Income Tax Holiday and no Income Tax changes; all of which promote growth. In addition measures announced in relation to tourism help support the vision of nurturing growth. A measure we think that the minister should have introduced is a tax on gambling winnings and an increase in the duty currently placed on betting should have been included in this year s budget.

Part 1 of the 2014 Budget Capital Gains Tax Relief to Entrepreneurs To promote entrepreneurship Michael Noonan announced a Capital Gains Tax relief available to entrepreneurs who re-invest disposal proceeds, on which CGT was paid, in assets for use in productive trading activities. The CGT payable on the disposal of the new investment will be reduced by the lower of the CGT paid on an earlier disposal in the period from 1 January 2010 and 50% of the CGT due on the disposal of the new investment. The relief will apply where the investment is made between 1 January 2014 to 31 December 2018, provided the entrepreneur does not dispose of the investment within three years 1. This is an excellent measure introduced by the Minister for Finance. Ireland is in need of more home grown, indigenous businesses in order to achieve growth. This measure will encourage entrepreneurs and investors to re-invest in active business in Ireland supporting the domestic economy and jobs 2. VAT Cash Receipts Building on a measure in the 10 point plan to help SME s in Ireland, Michael Noonan has announced a VAT Cash Receipts measure which increases the cash receipts basis threshold for VAT from 1.25 million to 2 million which will have effect from 1 st of May 2014. Since 2012, there has been an overall increase of 1 million in this threshold. This increase will make a big difference to businesses struggling to get paid by their customers. The effect of this measure is that small businesses will only have to pay over the VAT element of their sales to Revenue whey they get paid as opposed to when they send out their invoice 3. This effective measure successfully provides relief to smaller businesses who are having difficulties with cash flow management and customer payment. The relief will provide support to existing small businesses in order to sustain them and ensure their revival in the future. 1 Budget 2014 Headlines KPMG 2 Irish Tax Institute President Press Release on Budget 2014 3 Irish Tax Institute President Press Release on Budget 2014

No Income Tax Changes The Government has confirmed that there will be no increase in income tax or USC rates and no change to the income tax bands. No changes in income tax will help stabilise confidence in salary levels and disposable income and people can now budget in the knowledge of income certainty 4. This is good news for the retail sector in the run up to the Christmas period. This measure will surely build on the rise in consumer confidence and retail sales over the past few months resulting in a successful Christmas period for retailers. However, Revenue have controversially told almost a million homeowners to pay their property tax bill for 2014 by November 27 if they are paying by credit, debit card or cheque. This could be damaging to consumer confidence in the run up to Christmas. Consequently, Eamon Gilmore has called for the Revenue to reconsider the deadline for making the onceoff payment. Excise Duties s The Government have announced a range of measures regarding excise duty. There will be a 10 cent increase on a packet of 20 cigarettes, a 10 cent increase on a pint of cider/beer and a standard measure of spirits. There will also be a 50 cent increase on a 75cl bottle of wine. However, excise duties on petrol, diesel, home heating oil or gas remains unchanged. Excise duties on alcohol and cigarettes in Ireland were amongst the highest in the OECD before the budget resulting in a situation where Irish alcohol and tobacco prices are 63% higher than EU averages. The increase is a blow to the Irish drinks industry. Successive increases in alcohol excise have failed to deliver expected revenue targets as excise rates reach a point of diminishing returns. The increase in excise on these categories in Budget 2014 may spur cross border shopping and ultimately damage the Exchequer 5. However, maintaining excise duties on petrol, diesel, home heating oil or gas will promote growth. These are integral expenses to every business and household so avoiding duty increases is significant. Irish businesses already pay relatively high energy and fuel costs and further increases could negatively impact competitiveness 6. 4 Irish Tax Institute President Press Release on Budget 2014 5 IBEC, Budget 2014, Implications for Irish Business 6 IBEC, Budget 2014, Implications for Irish Business

Levy on Domestic Banks The Government has decided that the banking sector should make an annual contribution of 150 million to the Exchequer for the period from 2014 to 2016. This contribution is indicative of the significant role played by the banking sector in the crisis 7. It will be based on the levy previously in place between 2003 and 2005. The contribution from each financial institution will be broadly based on the amount of tax paid on deposit interest in 2011. The government s introduction of this levy is unsurprising considering the fall of 400 million in fees from the bank guarantee scheme however it won t be helpful in attracting foreign investment into state-owned banks and will be viewed negatively by foreign banks operating in the domestic market 8. Despite this, it is important that the banks contribute to raising the necessary revenue to reduce the deficit due to their role in the crash. However, Bank of Ireland held that the levy will cost them 120 million. Although this measure raises necessary revenues, it does not promote growth in the banking sector. R&D Tax Credit The R&D credit currently applies to incremental expenditure with reference to a fixed base period of 2003. Successive Finance Acts have provided that the first 200,000 of qualifying R&D expenditure benefited from the 25% R&D tax credit on a volume basis. The threshold has now been increased to 300,000. Michael Noonan has also indicated that the base year will be phased out 9. In relation to outsourcing limits of R&D, the present sub-contacted R&D costs are eligible where they do not exceed 10% of total costs or 100,000 where appropriate 10. The Budget for 2014 has now increased the outsourcing limit for sub-contracted R&D to 15%. This is one of the most significant growth promotion measures announced in the budget. It is a clear statement to the FDI community that Ireland remains open for R&D business and will support innovation through its tax policy. This clarity was needed to counteract uncertainty created by the review process and negative media commentary regarding its perceived 7 http://www.finance.gov.ie/documents/speech2013/spmn234.pdf p. 10 8 PWC, New Grounds for Growth? Budget 2014 p. 6 9 PWC, New Grounds for Growth? Budget 2014 p. 5 10 PWC, New Grounds for Growth? Budget 2014 p. 5

abuse 11. Michael Noonan has restored confidence in Ireland s ability to attract and maintain R&D mobile investment. Tourism Budget 2014 aims to capitalise on increasing tourism by retaining the temporary VAT rate of 9% and abolishing the Travel Tax. 8 million has been allocated for development of the Wild Atlantic Way. It is estimated that for every additional 1000 tourists that visit Ireland there is an additional 15 jobs created and every 1 million in tourist expenditure results in the creation of 34 jobs in the sector 12. Taxes on the tourism industry amounted to 1.3 billion in 2012, of which 1 billion came from foreign tourism. In 2012 the tourism industry accounted for 3.8% of all tax revenue 13. The decision to abolish the travel tax and retain a lower rate of vat on tourism are positive measures which have already resulted in an increase in tourism with airlines announcing more flights to Ireland. Ryanair have announced an additional 300,000 seats for flights to Shannon Airport 14 which will be a significant boost to the economy and should mitigate the loss in the tax revenue by way of tourist spending. 11 PWC, New Grounds for Growth? Budget 2014 p. 5 12 http://www.failteireland.ie/failteireland/media/websitestructure/documents/3_research_insights/3_gene ral_surveysreports/tourism_facts_2012.pdf?ext=.pdf 13 http://www.failteireland.ie/failteireland/media/websitestructure/documents/3_research_insights/3_gene ral_surveysreports/tourism_facts_2012.pdf?ext=.pdf 14 http://www.rte.ie/news/business/2013/1024/482422-ryanair-shannon-airport/.

Part 2 Propose one measure that the Minister should have introduced In our opinion, increased taxation of the gambling industry is a measure that should have been implemented in this year s budget. We propose the introduction of a tax on gambling winnings and an increase in the duty currently placed on betting. Presently there is a 1% duty on betting, having been extended to online betting in 2013. 15 All bookmakers, whether online or offline, that take Irish bets are liable to pay this betting levy. Betting exchanges are subject to a 15% tax on gross profits 16. From the perspective of the bet placers, gambling proceeds aren t considered subject to income tax and 17 S 613 (2) of the Taxes Consolidation Act 1997 stipulates that winnings from betting (including pool betting), lotteries, sweepstakes, or games with prizes shall not be chargeable gains with regards to capital gains tax 18. Tax revenues had steadily decreased in recent years prior to the government s introduction of the new bet taxing legislation which was much delayed. In 2001 a 5% tax was applied to betting and the government collected almost 70 million as a result. The subsequent reduction of this tax rate and the continued exclusion of online operators from having to pay it resulted in the government generating just 27 million in tax revenue from the gambling industry in 2012 19. It has been predicted that by enforcing this tax on online betting operators, between 15 million and 17 million extra tax may be collected 20. We propose an increase in the betting duty of 1%. By placing a 2% duty on Irish punters transactions the government will be able to substantially increase the revenue received from the gambling industry. Other countries including the USA and Spain have already placed far 15 Online Betting In Ireland, Bradley Tax Consultants. March 2011 16 OnlineBetting To Yield 50million, Geogg Percival, Irish Examiner, 12 th May 2012 17 Risky Business-income tax on gambling, TaxandLegal.ie, http://www.taxandlegal.ie/articlec.html 18 Section 613, Taxes Consolidation Act,1997. http://www.irishstatutebook.ie/1997/en/act/pub/0039/sec0613.html 19 Bet tax to generate new set of challenges, John Greene, Irish Independent 13/01/2013 http://www.independent.ie/sport/other-sports/bet-tax-to-generate-new-set-of-challenges-28957642.html 20 Online gambling tax set to accumulate 17million for state, Barry O Halloran, Irish Times 9/07/2013 http://www.irishtimes.com/business/sectors/retail-and-services/online-gambling-tax-set-to-accumulate-17- million-for-state-1.1457036

higher taxes on gambling to raise tax revenues. Deloitte assessed the tax system Spain had implemented in relation to gambling and advised that a tax rate of 10% be applied, as opposed to the punitive 25% currently in place. Accordingly it is evident that our proposed rate would not result in the same negative profitability outcome experienced in Spain. 21 Since there is no reasonable chance of profit from gambling, it cannot be considered as a trade. Income tax therefore cannot be applied as identified in the recent Canadian case Le Blanc v. Queen 22. In addition, there is an addictive nature to gambling, as identified by Rowlatt J. in the prominent Australian gambling case of Graham v Green, it cannot constitute a trade. Therefore income tax isn t applicable. In order to raise tax revenues we propose the introduction of a 10% levy on gambling winnings 23. The revenue generated from our proposals could be utilised to reduce the budget deficit. Gambling operators could continue to take responsibility for payment of the betting duty to the Revenue Commissioners. In addition, the revenue gained could be used to support the struggling racing industry that has seen its funding dramatically reduced by 20million to 56.3million since 2008. 21 Portugal to open online gambling market, but will It learn from Spain s mistakes, Stephen Stradbrooke October 5 2013 http://calvinayre.com/2013/10/05/business/will-portugal-learn-from-spain-online-gamblingmistakes/ 22 Risky Business-income tax on gambling, TaxandLegal.ie, http://www.taxandlegal.ie/articlec.html 23 Bet tax to generate new set of challenges, John Greene, Irish Independent 13/01/2013

Conclusion To conclude, we believe that Budget 2014 will more successfully promote growth than previous budgets. We believe the vision of this budget is built on nurturing growth. Michael Noonan has announced a range of measures that will encourage entrepreneurs to pursue start ups, such as the CGT relief available to entrepreneurs and the Start Your Own Business Income Tax Holiday available to qualifying entrepreneurs. The Minister for Finance has also announced measures that will support existing struggling businesses such as the VAT receipts measure and no increase in income tax. This support will be valuable in achieving future growth for struggling businesses, especially in the retail sector. As regards growth sectors, the Minister has implemented measures that will ensure the continued growth of sectors like tourism and R&D in Ireland. We believe that this budget will promote growth while raising the necessary revenues. It is a clear statement to the global community that Ireland is open for business once again and is ready to grow.