While youth unemployment has soared as huge swathes of the hospitality, tourism, retail and travel sectors have effectively shut down as a result of the pandemic, Ireland’s overall tax take has held up well thanks to one of the most progressive tax systems in the world. “It’s a classic K-shaped economy, where there’s a clear divergence between the real economy and the stock exchange,” says Liam Lynch, tax partner at KPMG in Dublin.
Nonetheless, the Irish government forecasts a 16.4% decline in total taxation revenue to €49.6bn in 2021, and a total government deficit of €20.5bn. Perhaps not surprisingly, Ireland’s budget for 2021 - the biggest spending budget in the history of the state - focused predominantly on COVID-19-related measures.
Having extended a wage subsidy scheme to employers to the end of March 2021, the standard rate of VAT was temporarily reduced from 23% to 21% until the end of February and a VAT reduction for the tourism and hospitality sectors from 13.5% to 9% will run until the end of the year. The government has also introduced a Stay & Spend tax credit, allowing individuals to claim back 20% of money spent on the hospitality sector until 30 April 2021, to a maximum credit of €125.
At the same time, the income tax deadline has been extended by four weeks for those who pay online and businesses affected by COVID-19 are being allowed to ‘warehouse’ VAT and payroll tax debts for a period of 12 months after normal trading resumes, accruing no interest on the unpaid debt during this period.
But incentivising growth will require more fundamental reform of a tax system reliant on windfall revenues from the profits of large multinationals taking advantage of the country’s 12.5% headline corporate tax rate; just 100 companies account for 70% of the total corporate tax take. Speculation is rife that the government may revisit Ireland’s Enterprise Investment Scheme and more general expansion of the entrepreneur regime to encourage investment in the next generation of business alongside more politically difficult decisions such as reducing the capital gains tax rate from 33%.
The power of entrenched special interests has stymied meaningful reform since the 1980s. While Republicans have sought to simplify the regime and reduce the tax burden on companies and individuals, the Democrats have aimed to use the tax code as a way to redistribute national income. Zigzagging between these two poles has resulted in a tax code that runs to around 7,000 pages with almost a trillion dollars in annual exemptions and loopholes.
But the combination of unprecedented levels of debt, an unsustainable budget deficit and the election of President Biden signals a change of tack. “The general direction is towards a more progressive system,” says David Rosenbloom, James S. Eustice Visiting Professor of Taxation and the Director of NYU’s International Tax Program in the US.
Already during his election campaign, Biden indicated that he would raise the corporate rate to 28%; install a corporate minimum tax; raise the marginal tax rate for individuals earning more than $400,000 to 39.6%; and raise the capital gains rate on individuals earning more than $1m.
“Post-COVID-19, there will be pressure to raise corporate taxes, and the economy could withstand that. Most experts agree that the US ought to have a relatively low-taxed corporate sector with much fewer special rules and deductions, which are basically deals cut for special interests,” Rosenbloom says.
The possibility of some form of national system of VAT also looms large. “It can’t rely on income tax to fund the government.” Rosenbloom adds. “If the country is to properly invest in its health, education and so on then the tax system needs to serve that.”
One change that would make all the difference in the US tax system would be to adequately fund the Internal Revenue Service (IRS), Rosenbloom says. “Americans have to understand that if they want a decent health system, proper education and an international presence in the world, then they have to pay for it."
The National Treasury and the South African Revenue Service have provided three types of measures to help businesses stay afloat; cash flow relief, deferral of the amount that has to be paid, and a relaxation of certain deadlines.
From 1 May 2020, the government introduced a four-month holiday for skills development levy contributions (1% of total salaries). Meanwhile, smaller VAT vendors in a net refund position were temporarily permitted to file monthly instead of once every two months, to unlock the input tax refund faster. Businesses of all sizes impacted by the pandemic can apply directly to the Revenue Service to defer tax payments without penalty.
At the same time, tax compliant businesses were given the option of deferring 20% of their employees’ tax liabilities over four months (ending 31 July 2020) increasing to 35% over six months from 7 September 2020 to 5 February 2021. They could also defer a portion of their provisional corporate income tax payments without penalties or interest. The gross income threshold for both deferrals was increased from R50m to R100m.
The filing requirement and first carbon tax payment were delayed by three months to 31 October 2020 to provide time to complete the first return, as well as cash flow relief in the short term, and to allow for the utilisation of carbon offsets as administered by the Department of Mineral Resources and Energy.
Plans outlined in the 2020 Budget to broaden the corporate income tax base were also put on hold.
They included restricting net interest expense deductions to 30% of earnings; and limiting the use of assessed losses carried forward to 80% of taxable income. Both measures were to be effective for years of assessment commencing on or after 1 January 2021 and have been postponed until 1 January 2022 at the earliest.
The Australian economy has weathered the COVID-19 storm relatively well, with a contraction in GDP of around 5%. However with both Federal and State governments facing massive deficits and unemployment set to rise, there are concerns that a quarter of a century of uninterrupted economic growth has allowed the tax system to get very leaky.
Now the onus is on the Australian government to pay for expensive COVID-19 rescue measures through revenue raised through the tax system, and to have a tax regime that delivers economic growth. As both internal travel restrictions and some social distancing requirements are relaxed, the government is looking to stimulate both business investment and consumer demand to generate jobs.
Already Australian companies are able to temporarily expense 100% of the cost of depreciable plant and equipment and some companies are allowed to carry back their current year losses to offset profits in prior years. The government has brought forward proposed personal tax rate reductions for low and middle income earners, introduced a limited period 100% expensing of depreciable plant and equipment for entities with less than a $5bn turnover, and a temporary loss carry-back provision for companies.
Australia’s economy is epitomised by high taxes, levied on a narrow base of both corporates and individuals. “On the corporate side it results in an effective tax rate of around 17%, with high rates applying to mining companies and banks whose super profits are effectively taxed,” explains Robert Breunig, Director at the Tax and Transfer Policy Institute, part of the Australian National University in Canberra.
However, there is mounting evidence that Australia’s tax regime stifles other types of businesses, with a growing number of start-ups taking advantage of offshore structures. But solutions aren’t simple. A lower corporate rate, for instance, could result in a lot of money leaving the country via dividends to overseas investors in banks and mines.
The need for long-term structural reform is becoming more urgent. “As the economy recovers it is expected that there will be a change of focus towards the sustainability of the tax system and in particular intergenerational equity,” says Susan Franks, Senior Tax Advocate at Chartered Accountants Australia and New Zealand. “But that discussion seems too far off in the future as the world is still dealing with various waves of COVID-19.”
Hear more at Virtually Live!
ICAEW's flagship digital conference returns for 2021 and includes sessions on tax. Hear from experts including Rebecca Benneyworth and ICAEW's Anita Monteith.
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