realestate in-vestment trusts

Taxation in the Republic of Ireland

The system of taxation in 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 current expenditure programs, such universal free education (including third level), free healthcare, old age pensions and unemployment benefit, and public capital expenditure, such as the National Development Plan

History of Irish taxation

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.

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

International Comparison

The tax burden in Ireland, as measured by Forbes Misery Index, 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), Hong Kong (43.5) and 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.

Taxes on income

The tax system in Ireland for employees is relatively straightforward; they themselves do not have to file annual tax returns unless they have over- or underpaid for some reason. Employers deduct applicable tax at source. However the system for collection of tax due on additional income such as dividends, share sales, and inheritance is somewhat more complicated for individuals. The self-employed and company directors are responsible for completing an annual tax return under the self-assessment system.

The 'Pay As You Earn' (PAYE) system

The PAYE system covers all employees. Each individual will qualify for tax credits based on their own circumstances. These will include the standard individual tax credit, for example, and others such as refuse disposal charges, union subscriptions, paying for rented accommodation, etc. After applying for the tax credits, a form will be sent to the employer setting out the applicable cut-off points and rates applicable to the person in question. The employer will then deduct tax directly from the employee according to these instructions, each pay period, and remit the tax directly to the Revenue Commissioners.

In 2007 the standard income tax rate was 20% (payable on the first €34000 of taxable income, for a single person) and the higher rate was 41% (payable on the balance).

Pay Related Social Insurance

In addition to PAYE, another tax called Pay-Related Social Insurance (PRSI) is also payable, which is similar to National Insurance in the United Kingdom.

For employees, for the 2006 tax year, this consisted of a 4% Social Insurance payment, payable on annual earnings up to €46,600 (though the first €127 earned in a week is exempt), and a 2% Health Contribution. Earnings above €46,600 were subject only to the 2% Health Contribution. In addition, the employer is also liable to pay a PRSI contribution per employee, at 10.75% of the employee's gross income, with reductions for lower earners.

The Health Contribution goes to the Department of Health and Children to help fund the public health service.

There are various special rates of PRSI which apply to self-employed people (3%), civil servants employed since before April 1995 (0.9%), and other small categories.

Taxation on those self employed

Preliminary Tax; The Self Assessment system

Capital gains tax

Capital gains tax is charged at the same rate as the standard rate on the difference between the sale and purchase prices of most capital assets. Indexation relief is allowed up to 2003, whereby the purchase price is multiplied by a fixed inflation factor derived from the Consumer Price Index. Direct costs of purchase and sale can also be deducted, and losses on one asset can be offset against gains on another.

There are a few exemptions available, including:

  • The first €1,270 of a gain per person every year is exempt
  • Transfers between spouses are totally exempt
  • Transfers on death are exempt, although they are subject to Capital Acquisitions Tax (see below)

Tax on gains realised in the first nine months of the year is payable by October 31 that year, and tax on gains realised in the final three months of the year is payable by January 31 the next year.

Deposit interest retention tax

Deposit Interest Retention Tax better known as DIRT is a retention 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 (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. The Allied Irish Bank paid a substantial sum to the Revenue Commissioners without admitting liability.

Deductions from tax liabilities

Some items of expenditure can be deducted from a person's income for tax purposes, generally referred to as getting tax relief. In some cases the tax must be claimed retrospectively, in others it is processed as an increase to tax credits. The vast majority are only allowed at the standard tax rate of 20%.

Medical insurance

A person purchasing private medical insurance is entitled to tax relief at 20%, which is usually given at source - the person pays 80% of the cost, and the government pays the rest directly to the insurance company.

Medical expenses

Tax relief is available on medical expenses, including doctor's visits, prescription medicines (to a maximum of €85 per month, above which the Health Services Executive will repay the entire balance), hospital costs and non-routine dental treatments. While it is only available retrospectively (i.e. by completing a tax return at the end of the year), the relief is awarded at the highest rate of tax that the person is paying. It can be claimed for a person's own expenses, or expenses which they pay on behalf of a relative or dependant.

Taxes on consumption and purchases

Value added tax

Ireland's value added tax (VAT) is part of the European Union Value Added Tax system and 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. 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, children's clothing and educational services and items, to 21% on the majority of goods. There are also intermediate rates of 5% and 13.5%, the latter applied to many services. A comprehensive list 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.

Excise duties

Stamp duty

In Ireland stamp duty is charged on the conveyance of residential property, non-residential property, long leases, company share transfers, bank cheques and cards (i.e. ATM cards and credit cards), and insurance policies.

On property

The rates of stamp duty liable on the purchase of a residential property in Ireland were changed in the 2008 Budget. Rates 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) are exempt entirely. Persons buying certain newly-constructed houses are also exempt. The rates currently applicable are as follows:

Value of property Full rate
Less than €125,000 Exempt
€125,001 - €1,000,000 7%
€1,000,001 + 9%

No stamp duty is charged on the first €125,000 of any residential property purchase, 7% is charged on the balance up to €1 million. 9% is paid on the excess over €1 million.

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.

Also see

Financial products

Credit card accounts are subject to a €40 annual duty, and Automatic teller machine and Debit cards are subject to €10 each annually. Cards which perform both functions are subject to the tax twice, i.e. €20 total. Cards that are unused in the entire year are not chargeable.

Cheques incur a €0.15 tax. Insurance polices have a €1 duty on them.

Capital acquisitions tax

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

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) or taxable inheritance (s 11)

   

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) , 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)

   

Rates of tax

   

Inheritance tax

   

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

   

Threshold amount: Nil

   

The balance: 20%

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) , 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)

   

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).

   

Exemptions

   

Exemption thresholds

   

For the year 2005, the group thresholds (Schedule 2 para 1) , 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.

   

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) , inheritance tax (s 71) , and probate tax (FA 1993 s 115A).

   

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

   

(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)

   

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

   

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

   

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

   

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

   

(g) Pension lump sums are exempt (s 80)

   

(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)

   

(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)

   

(j) Property acquired under a self-made disposition is exempt (s 83)

   

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 ).

   

(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)

   

(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)

   

(d) Favorite nephew (or niece) relief (Schedule 2 para 7)

   

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

   

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

   

(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)

   

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.

Taxes on business

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, foreign sourced income and profits and rental income.

Taxation evasion and tax avoidance

Tax evasion in Ireland, while a common historical problem, is not as widespread in 2006. The reasons are twofold - most people pay at source (PAYE) 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 avoidance. Tax avoidance is a legal process where one's financial affairs are arranged so as to legitimately pay less tax. In some cases the Revenue will pursue individuals or companies who avail of tax avoidance; however their success here is limited because tax avoidance is entirely legal.

The areas where tax evasion can still be found are businesses that deal in a lot of cash. The trades, small businesses, 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.

Other methods have also been employed by government to combat tax evasion. For example, the introduction of a Taxi Regulator and subsequent regulations for the taxi industry has meant that the opportunities for taxi drivers to avoid declaring cash income have dwindled. By law, taxi drivers must now issue an electronic receipt for each fare, effectively recording their income.

Local Taxes

Prior to 1977, all property owners in Ireland had to pay "rates" - based on the "rateable valuation" of the property - to the local authority. Rates were used by local authorities to provide services such as mains water and refuse collection. Rates for private residences were abolished in 1977, with local authorities instead receiving funding from central government. They continue in operation for commercial property.

Recently the government have attempted to re-introduce some local taxes. A charge for water was introduced but later scrapped after mass protests. A "bin tax", for domestic refuse collection, has also been introduced and has proved widely unpopular. Opponents claim that this is double-taxation - that in the aftermath of the abolition of domestic rates, their taxes were increased to fund local authorities.

Motor Tax is paid into the Local Government Fund and is distributed among local authorities.

See also

Notes

References

Print

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

Online

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