Taxation in the Republic of Ireland

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The system of taxation in the Republic of Ireland is broadly similar to the system of taxation in the United Kingdom. On an individual basis most people are taxed through the Pay As You Earn (PAYE) system, based on their ability to pay - the system is quite progressive with little or no tax on low earners and a high rate applied to top earners. For businesses, tax rates are among the lowest in the world with many firms enjoying corporation tax rates of between 10% and 12.5%. A large amount of central government tax revenue is derived from value added tax (VAT), excise duties and other taxes on consumption. The Irish tax system is primarily in place to pay for universal free education (including third level), free healthcare, old age pensions and unemployment benefit.

Contents 1 History of Irish taxation 2 Government revenue and expenditure 3 International Comparison 4 Taxes on income 4.1 The pay as you earn system 4.2 Taxation on those self employed 4.3 Pay related social insurance 4.4 Capital gains tax 4.5 Deposit interest retention tax 5 Taxes on consumption and purchases 5.1 Value added tax 5.2 Excise duties 5.3 Stamp duty 5.3.1 On property 5.3.2 Financial products 6 Capital acquisitions tax 6.1 Rates of tax 6.1.1 Inheritance tax 6.2 Discretionary trust tax 6.3 Probate tax 6.4 Exemptions 6.4.1 Exemption thresholds 6.4.2 Other exemptions 6.5 Reliefs 6.6 Life interest 7 Taxes on business 7.1 Corporation tax 8 Taxation at local level 9 Tax forms 9.1 Articles and books 10 References 10.1 Print 10.2 Online 11 See also

[edit] History of Irish taxation

[edit] Government revenue and expenditure

VAT and income tax are the largest sources of revenue for the government, generating over €20bn a year between them. This represented over 60% of the total tax take of €33.4bn in 2004 (a future €800 m of government revenue was generated from non-tax sources such as interest on loans, coin issues, and the central bank surplus).

Other significant contributors to the national budget in 2004 were corporation tax and excise duties, which contributed roughly €5bn each. This is somewhat surprising as Ireland has the third lowest rate of corporation tax in the world; with a top rate of just 12.5%. Many multinationals are engaged in tax optimisation utilising Ireland's favourable tax rate by reporting the bulk of their profits in Ireland or using transfer pricing to artificially lower profits in high tax countries and report the profits in Ireland [1].

Of the Governments revenue, over €9bn (26% of expenditure) is spent annually on the health services, €11bn (31%) on social welfare and €6bn (17%) on education.

[edit] International Comparison

The tax burden in Ireland, as measured by Forbes Misery Index [2], is lower than most of the world. It gets a score of 90.3, lower than that of France (174.8), Germany (117), the United Kingdom (111.3), and Canada (111.2) However it is beaten by South Africa (85), Taiwan (82.1) Singapore (79) the United Arab Emirates (18).

Another popular measure of the tax burden in a country is by working out total tax revenue as a percentage of GDP. By this measure Ireland comes out low, with a score of 31.2% in 2003. This compares to 51.4% in Sweden, 49.4% in Denmark, 42% in the United Kingdom, 28.7% in Lithuania and 29.1% in Latvia. Currently Ireland scores 4th lowest in Europe [3].

[edit] Taxes on income

The tax system in Ireland for employees is relatively straightforward; they themselves do not have to file annual tax returns as their employer deducts applicable tax at source. However the system for collection of tax due on additional income such dividends, share sales, and inheritance is somewhat more complicated for individuals. For the self employed, they themselves are responsible for completing an annual return under the self-assessment system.

[edit] The pay as you earn system

Main article: PAYE

[edit] Taxation on those self employed

Preliminary Tax; The Self Assessment system

[edit] Pay related social insurance

[edit] Capital gains tax

[edit] Deposit interest retention tax

Main article: Deposit Interest Retention Tax

Deposit Interest Retention Tax better known as DIRT is a tax charged on interest earned on bank accounts. It was first introduced in Ireland in the 1980s to reduce tax evasion on unearned income. DIRT tax is deducted at source by the banks and savings-institutes, on behalf of the government, at a rate of 20% on all interest earned. Over 65's and the incapacitated who are exempt from income tax can reclaim DIRT tax by filling out Form 54D, this is available from local tax offices.

In the 1990s and early 2000s a large amount of tax evasion in relation to DIRT was uncovered in Ireland. Hundreds of wealthy individuals had set up secret off-shore bank accounts (famously, the Ansbacher accounts) to avoid paying DIRT (and perhaps to conceal untaxed income). Thousands more (allegedly¹ encouraged by their banks) had opened bogus "non-resident" accounts (and therefore, DIRT exempt under double taxation agreements). Several investigations have led to heavy fines for the people involved, but the main opposition parties still maintain that not enough has been done to punish the banks who encouraged this illegal behaviour.

Note 1: The Allied Irish Bank paid a substantial sum to the Revenue Commissioners without admitting liability.

[edit] Taxes on consumption and purchases

[edit] Value added tax

Value added tax (VAT) is a major source of revenue for the Irish government, contributing over €10bn to the exchequer in 2004. It is collected by VAT registered traders. All traders who sell over €51,000 of taxable goods or over €25,500 of taxable services must register; although firms/persons with turnover less than these limits may also register. Those registering for VAT must fill out either Form TR1 (for individuals, partnerships, trusts or sole traders) or Form TR2 (for companies).

VAT rates range from 0% on books and educational services and items, to 21% on the majority of goods. A comprehensive index of the VAT rates on 2,500 items is available from the revenue commissioners.

Traders collecting VAT can deduct the VAT incurred on their purchases against their VAT liability. This is to avoid cumulative taxation. The VAT period is currently two calendar months. A VAT return is made on the 19th day of the following month. Once a year a detailed breakdown of VAT returns most be prepared by traders and submitted to the government - traders may choose their own date for this. Traders with low VAT liabilities may opt for an annual payment instead of the standard bi-monthly one.

[edit] Excise duties

[edit] Stamp duty

In Ireland stamp duty is charged on the purchase of a property (in addition to VAT), on some financial documents, on the formation of a company or increase in its share capital and on financial products such as cheques and credit cards. Stamp duties raise about €1.6bn annually for the exchequer; about 5% of total tax revenue.

[edit] On property

The rates of stamp duty liable on the purchase of a residential property in Ireland vary from 0% to 9%. First time buyers (i.e.someone who has not purchased a house before in Ireland or in any other jurisdiction) pay a reduced rate depending on the value of property; indeed they are exempt from paying any stamp duty on houses costing less than €317,500 or on certain newly constructed houses. The rates currently applicable are as follows:

Value of property	First time buyer rate	Full rate
Less than €127,000	Exempt	Exempt
€127,001 - €190,500	Exempt	3%
€190,501 - €254,000	Exempt	4%
€254,001 - €317,500	Exempt	5%
€317,501 - €381,000	3%	6%
€381,001 - €635,000	6%	7.5%
Over €635,000	9%	9%

New owner occupied houses or apartments with a floor area of less than 125 m² are exempt from the above stamp duty. Buildings used for other purposes (non-residential properties) are charged at an increasing rate starting at 0% for a property under the value of €10,000 rising to 9% for properties over €150,000. The Irish Minister for Finance Brian Cowen did not change the rates of stamp duty in the 2007 Irish Budget as widely hoped by many first time buyers.

[edit] Financial products

In the early 2000's, in a drive to raise more money without raising income tax rates, the government created several new taxes, unaffectionately dubbed stealth taxes by the public and media. Some of these taxes came in the form of new stamp duties on financial products. Today in Ireland, Credit Cards are subject to a €40 annual duty, and Automatic teller machine and Laser cards are subject to €10 each annually.

There are several other charges in existence also; cheques incur a €0.15 tax and mortgages/debentures over €254,000 are subject to a duty of 0.1% (with a maximum charge of €630). Insurance polices have a €1 duty on them, and the formation of a company is charged at 0.5%.

[edit] Capital acquisitions tax

Capital acquisitions tax is charged on property that has been acquired gratuitously, i.e., gifts ([4]) and inheritances [5].

The person providing the property is the disponer (or donor in the case of the gift), and the disposition is the method by which he passes the property to the acquirer. In the case of property acquired under a will, the testator (i.e., the person who made the will) is the disponer. In the case of property acquired on intestacy (i.e., from a person who died intestate, in other words, without making a will), the deceased is the disponer. The term disposition is very widely defined to include not only a will or intestacy, but any method (including, for example, any trust covenant, agreement or arrangement) by which property can be passed from one person to another. The date of the disposition is the date of death of the disponer in the case of property passing by will or intestacy, and in other cases it is the date on which he provided the property (or bound himself to provide it).

To be chargeable, the property must be a taxable gift (s 6)[6] or taxable inheritance (s 11)[7].

A gift is entirely taxable if:

(a) the disponer was resident or ordinarily resident in the State at the date of the disposition, or at the date of the gift,

(b) the donee was resident or ordinarily resident in the Sate at the date of the gift.

Otherwise, only the part or proportion of the property situate in the State at the date of the gift is taxable.

An inheritance is entirely taxable if:

(a) the disponer was resident or ordinarily resident in the State at the date of the disposition, i.e., the date of death, or

(b) the successor was resident or ordinarily resident in the Sate at the date of the inheritance.

Otherwise, only the part or proportion of the property situate in the State at the date of the gift is taxable.

As a transitional measure, a foreign-domiciled person will not be regarded as resident or ordinarily resident in the State for CAT purposes before 1 December 2004.

Tax is generally charged on the property’s taxable value (s 28)[8], which is computed as:

Market value

less liabilities costs and expenses payable out of the gift or inheritance

= incumbrance free value

less consideration paid by acquirer in money or money’s worth

= taxable value

Tax is charged on the valuation date. In the case of a gift, this is the date of the gift. In the case of an inheritance, it is generally the date of death of the deceased, or the earliest date on which his personal representatives can retain the inherited property for the beneficiary (s 30)[9].

[edit] Rates of tax

[edit] Inheritance tax

The rates of tax applicable to gifts and inheritances are as follows:

Threshold amount: Nil

The balance: 20%

[edit] Discretionary trust tax

Assets placed in discretionary trusts are subject to:

(a) a once-off charge of 6%, which is due within four months of the valuation date (s 18)[10], and

(b) an annual charge of 1%, which is due on 5 April each year, and payable by 5 July each year during the trust’s lifetime (s 23)[11].

[edit] Probate tax

Probate tax was charged up to 6 December 2000 at 2% on the net value of an estate, and was due within nine months of the date of death (FA 1993 s 113).

[edit] Exemptions

[edit] Exemption thresholds

For the year 2005, the group thresholds (Schedule 2 para 1)[12], indexed for inflation, are:

(a) €466,725 (Group 1) where the beneficiary’s relationship to the disponer is: son or daughter, minor child of a predeceased son or daughter, parent (in the case of a non-limited interest taken on the death of a child). Child includes a foster child (since 6 December 2000) and an adopted child (since 30 March 2001).

(b) €46,673 (Group 2), where the beneficiary’s relationship to the disponer is: lineal ancestor, lineal descendant (not within (a)), brother or sister, nephew or niece.

(c) €23,336 (Group 3) where the beneficiary’s relationship to the disponer is: cousin or stranger.

For gifts and inheritances taken on or after 5 December 2001, only prior benefits received since 5 December 1991 from the same beneficiary within the same group threshold are aggregated with the current benefit in computing tax payable on the current benefit.

[edit] Other exemptions

The other main exemptions from capital acquisitions tax are:

(a) Spouses’ exemption: Property passing between spouses is exempt from gift tax (s 70) [13], inheritance tax (s 71) [14], and probate tax (FA 1993 s 115A).

 The exemption also applies to property passing by Court order between separated or divorced couples (s 88)[15].

(b) Principal private residence. To qualify, the recipient must have lived:

 (i) for three years ending on the transfer date in the residence, or

 (ii) for three of the four years ending on the transfer date in the residence and the residence which it has replaced.

 In addition, the recipient must not have any other private residence and he must not dispose of the residence for six years after the transfer to him (s 86)[16].

(c) An inheritance taken by a parent from a pre-deceased child is exempt (s 79)[17].

(d) The first €3,000 of gifts taken in each calendar year is exempt (s 69)[18].

(e) A gift or inheritance taken for public or charitable purposes is exempt (s 76)[19].

(f) Objects of national, scientific, historic, or artistic interest, which the public are allowed to view, are exempt (s 77)[20]. This relief also extends to heritage property owned through a private company (s 78)[21].

(g) Pension lump sums are exempt (s 80)[22].

(h) Securities acquired by a beneficiary who is not domiciled or resident in the State from a disponer who held them for at least three years (s 81)[23].

(i) Personal injury compensation or damages, and lottery winnings are exempt. This exemption also covers reasonable support, maintenance, or education payments received by a minor child at a time when the disponer and the child’s other parent are dead (s 82)[24].

(j) Property acquired under a self-made disposition is exempt (s 83)[25].

[edit] Reliefs

The other main reliefs from capital acquisitions tax are:

(a) A surviving spouse may take the place and relationship status in respect of property acquired by the deceased spouse (Schedule 2 para 6 [26]).

(b) Agricultural relief. This applies to a farmer - an individual who on the valuation date is domiciled in the State, and at least 80% of the gross market value of his assets consists of agricultural property (i.e., farm land and buildings, crops, trees and underwood, livestock, bloodstock, and farm machinery).

The relief is a 90% reduction of the full market value. The relief may be withdrawn if the property is later disposed of within six years of the date of the gift or inheritance and the proceeds are not reinvested within one year of the disposal (six years in the case of a compulsory acquisition)(s 89)[27].

(c) Business relief. This applies to relevant business property, i.e., a sole trade business, an interest in a partnership, and unquoted shares in an Irish incorporated company.

The relief is a 90% reduction of the taxable value. The relief may be withdrawn if the property is later disposed of within six years of the date of the gift or inheritance and the proceeds are not reinvested within one year of the disposal (s 92)[28].

(d) Favorite nephew (or niece) relief (Schedule 2 para 7)[29].

(e) Double taxation in respect of US and UK equivalent taxes (s 106 [30], 107[31]).

(f) The proceeds of a life assurance policy taken out to pay inheritance tax or gift tax (s 72)[32].

(g) If the same event gives rise to a liability to both CAT and CGT, the CGT charge may be credited against the CAT up to the amount of the CAT charge (s 104)[33].

[edit] Life interest

This table is used to put a figure on the value of a life interest in property.

For example:

X (a male aged 66) inherits a life interest in a property worth €100,000. X’s life interest is valued at .4841 x €100,000 = £48,410.

[edit] Taxes on business

[edit] Corporation tax

See main article: Republic of Ireland corporation tax

Corporation tax is charged on the profits of companies which includes both normal income and chargeable gains. Certain expenses such as interest repayments can be offset against profits. The current rate of corporation tax in Ireland ranges from 10% to 25%, depending on the nature of the business.

The 10% rate, introduced in 1981, applies to a limited number of manufacturing firms, IFSC finance enterprises and businesses located in the Shannon Free Zone; all typically large multi-nationals. It is used as a marketing incentive to attract foreign direct investment (FDI) into Ireland. Despite being credited with helping the IDA secure millions of euro worth of FDI and thousands of jobs, it is currently being phased out with the last year of the 10% rate likely to be 2010.

The next rate, 12.5%, applies to all trading income and is the normal rate for most businesses. It again is very low when compared to international standards and its longevity (introduced in the mid 1990's by then Minister of Finance Ruairi Quinn) has ensured widespread confidence among international enterprises in the value of investing in the Irish economy.

The highest rate, 25%, applies to non-trading income such as interest gains, discounts received and rental income.

[edit] Taxation at local level

Tax Evasion in Ireland while a common historical problem is not as widespread in 2006. The reasons are twofold - most people pay at source (P.A.Y.E.) and the penalties for evasion are high. The Irish Revenue target specific industries every year. Industries have included fast food take away restaurants, banks and farmers.

A much more popular choice than tax evasion is 'Tax Avoision'. Tax avoision is a legal process where you use the current tax laws to construct shelters and schemes to 'avoid' tax. In many cases the Revenue will pursue individuals or companies who avail of tax avoision; however their success here is limited and in many cases are settled for much lower than the original tax liability would have been. However there have been some success stories for Revenue. A popular (but highly dubious) scheme involved investing money in films that subsequently 'lost' money. The Revenue aggressively pursued this scheme and 100's of investors are currently battling for their financial lives.

The areas where tax evasion can still be found are businesses that deal in a lot of cash. The trades, small businesses, traders etc will sell goods and perform services while accepting cash for the good/service. The buyer will avoid paying VAT at 21% and the seller does not declare the monies for Income Tax. Revenue perform random audits on businesses but the random level is small enough that it is sometimes worth a chance. Revenue claim a business will be audited roughly every seven years. In reality small businesses with low turnover will see the taxman much less. It is understandable why this is the case as the Revenue’s expectation of cost vs. reward would be high vs. low.

[edit] Tax forms

[edit] Articles and books

• Laffer at Work The success of the Irish Tax Reform.
• A Tax Policy for Growth and jobs An economic Evaluation of the Irish Tax Policy.

[edit] References

[edit] Print

• Irish Tax Guide - LexisNexis , 2004. ISBN 1-85475-688-5

[edit] Online

• Revenue.ie Office of the Revenue Commissioners
• BASIS - BASIS is a government help site for business.
• Oasis - Oasis is a government help site for individuals.
• Budget 2004
• Stamp Duty in Ireland - Information on Stamp Duty Rates in Ireland

[edit] See also

• Celtic Tiger
• Central Bank of Ireland
• Economy of the Republic of Ireland
• Economic history of the Republic of Ireland
• International Financial Services Centre
• Irish topics
• Office of the Revenue Commissioners
• Personal Public Service Number
• Rip-Off Republic