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The KPMG Tax Monitor
FINANCE DUBLIN | J UNE 2012
Tax Monitor security nor, crucially USC, for Irish purposes, is accounted for in this marginal tax rate analysis, the Report does not necessarily give a true comparison of how much tax is paid at higher income levels. KPMG’s Individual Income Tax and Social Security Rate Survey 2011 compared combined effective tax rates on employment across 88 countries worldwide and indicates that Ireland has the 20th and 11th highest effective tax rates for income levels of US$100,000 and US$300,000 respectively. Specifically in relation to effective rates of social security (employer and employee), it showed that Ireland moves from 46th place out of 88 countries for gross income of US$100,000 to 33rd place for gross income of USD$300,000, ahead of countries such as Germany, Switzerland, the US etc, indicating that our social security contributions are not relatively low at higher income levels.
The EU Report should not be used as justification for further increases to marginal income tax, USC or PRSI rates, if we are to avoid creating a hostile environment for those who are ambitious to work hard for financial reward. Property taxes For the first time the Report contains a revealing section on property tax. While Irish property taxes have declined from 2.9p.c. of GDP (nearly double the EU average) at the height of the boom, our 2010 rate of 1.6p.c. of GDP is well above the EU average, ranking seventh out of the EU-27. Most surprisingly, Ireland also ranks seventh in terms of recurrent property taxes. Commercial rates appear to be the cause of these high rankings. These have been left to grow as a burden on businesses without much scrutiny. The Report suggests that there
is room generally across the EU for a shift away from distortionary taxes on labour and capital towards recurrent immovable property taxes. It advocates recurrent over transaction property taxes as the latter can pose risks to budgetary stability in case of a boom-bust cycle, as indeed we have seen here, and can contribute to a higher unemployment rate by hindering mobility. This provides interesting food for thought as the Government considers the results of consultation on property taxation. Interestingly, the Report highlights how Ireland is one of the most fiscally centralised countries in Europe, where our local governments receive only about 3.4p.c. of tax revenues. It has been suggested that a newly extended property tax would increase these local contributions. ---------------------------------Generally this Report highlights the wide disparity which exists
between tax levels across Member States as a percentage of GDP, with that in the highest-taxing Member State (Denmark at 47.6p.c.) being over 75p.c. higher than that in the lowest taxing one. Ireland’s overall ranking is low. However we know from OECD studies and our previous experience that we have a tax policy which supports our remote location as a gateway to Europe and an attractive place to do business. Nonetheless, if we are to continue with this tax policy, which has served us well and which we need more than ever to foster growth right now, we must do more to prioritise what State expenditure is truly important as the inextricable link between State spending and taxes raised cannot be ignored. Colm Rogers is a tax partner at KPMG.
Prioritising a Green IFSC MIKE HAYES emphasises our opportunities to capitalise on existing expertise to become a global leader in Green finance.
reland will be developed as a centre of excellence in green finance and carbon management through the creation of an enabling, coordinated and supportive environment. This will be achieved through the Green IFSC initiative built on an enabling tax, regulatory and compliance framework”. This is the commitment given by the Government in its strategy for the International Financial Services Sector 2011-2016. This commitment is very welcome to those of us involved in the Green IFSC initiative. Recognising that the provision of sustainable financial solutions is going to become increasingly important, we are seeking to capitalise on Ireland’s track record of success in the IFSC, by extending existing expertise into Green Finance to create a centre of excellence which we can
promote globally. The Green IFSC is a publicprivate partnership with three key pillars – education, finance and carbon management. Mike Hayes Green Asset Management One of the main outputs from the Green IFSC group has been the identification of opportunities in the funds area. The Irish funds industry has bucked Irish and European economic trends. This is evidenced in EFAMA’s 2011 statistics which showed an overall European net outflow of UCITS funds of 88billion in 2011. Ireland was the leader of only nine European countries showing
inflows (62billion in net new money) in 2011. Ireland is now the number one alternative funds centre, servicing more than 40p.c. of the world’s hedge fund assets. Meanwhile, investors (including pension funds, institutional investors and others) are increasingly focussing on green assets in their portfolio in the hope of stable long-term, relatively low-risk cash-flows, which can benefit from Government incentive measures in many countries. These investors frequently have to choose between funds located offshore, such as Cayman, and funds located in regulated jurisdictions, such as Ireland, Luxembourg etc As European Institutional investors increasingly require regulated structures to meet internal governance rules and because of the Alternative
Investment Fund Manager’s Directive (AIFMD), Ireland can, and is, capitalising on its alternative and retail funds expertise, in a respected regulatory environment to become the global leader in this area of green asset management. The Irish funds tax environment has clarity, certainty and transparency (an original OECD white list jurisdiction) and benefits hugely from a welldeveloped and continuously expanding tax treaty network (over 60 now). Irish authorised funds enjoy a gross roll-up regime, whereby income and gains accumulate within the fund free of Irish tax. By following appropriate procedures, foreign investors are not subject to Irish tax and Irish investors are generally subject to exit tax only (30% in most circumstances with certain exceptions). The regime
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Tax Monitor also facilitates various types of legal fund structures. Such factors have resulted in the rapid growth of green assets under management here, which have doubled in the past year and a half and tripled in the last four years. It is estimated that Ireland is already involved in management, domiciliation or servicing of at least $10 billion worth of global green funds. We are seeing significant increases in numbers locating their investment management function here as well as the more traditional administration and custodial services, with companies like Blackrock and Kleinworth Benson choosing Ireland for front office green investment/asset management activities. Innovative Green Enterprise Several Irish companies are also becoming successful in innovative international green enterprises, including Mainstream Renewable Power, NTR plc and many others, several of them start-ups, such as BNRG Renewables featured in April’s Finance Dublin. The introduction of the Employment and Investment Incentive (EII) scheme in November 2011 is very welcome as it will enable renewable energy companies to source funding at a critical early stage for their development. The removal of the requirement that a qualifying company must carry on its activities principally in the State (but rather it must now just carry on its activities through a fixed place of business here) is particularly helpful as many green enterprises are investing in and developing renewable energy projects outside of Ireland. However, to enable EII to work as a serious alternative to bank finance and therefore support this vital growth sector of our economy, this relief should be removed entirely from the ‘specified reliefs cap’ and the limit on individual relief of 150,000 per annum should be increased or removed.
A symbiotic relationship can be established, and nurtured through the Green IFSC initiative, whereby the worldwide experience and expertise being developed by these renewable companies can also be tapped into for the purposes of Green asset management in Ireland, while an increased international funds presence in Ireland would enable Irish developers to develop links with them and to use the Green finance advisory and regulatory expertise to the benefit of their own financing needs. A broad supportive tax environment The Green industry covers a wide ambit. Renewable energy projects, such as wind and solar, are still the most popular investments. Opportunities are also increasingly being recognised and acted upon in the areas of carbon-trading and ‘clean tech’, such as micro-energy generation, electric cars etc. Ireland has abundant natural resources and therefore the potential to create significant employment and export opportunities in this area. It was very welcome that Finance Act 2012 extended the qualifying investment period for tax relief for corporate investment in renewable energy to 31 December 2014. Ireland has a role to play in all aspects, from carbon trading and the raising of finance through project bond issuance, securitisation of greenhouse gas emission allowances and other financial assets to green sector insurance offerings. Finance Act 2011 made a fundamental extension of our securitisation offering to encompass carbon credits. Finance Act 2012 has now further expanded this to specifically include carbon forest offsets (and exempt them from stamp duty on disposal), which is a groundbreaking move in green finance globally. The UN has set up a REDD programme, under which forest carbon credits can be monetised. This is estimated to be
valued at US$50billion over the next few years. Companies will purchase forest carbon credits, which are tradable financial instruments generated by reforestation and similar projects, to compensate for their carbon emissions. These changes position Ireland to be at the forefront of this new segment of the securitisation industry, whilst supporting the domestic and worldwide low-carbon economy. Finance Act 2012 also contained some new provisions dealing with the tax treatment of the purchase and sale of emissions allowances by companies. It is expected that there will be further helpful developments in this area. “Ireland has a role to play in all aspects, from carbon trading and the raising of finance through project bond issuance, securitisation of greenhouse gas emission allowances and other financial assets to green sector insurance offerings.” More innovative thinking While many early-stage Irish ventures such as forestry cleantech company, Treemetrics in Cork are actively innovating in Green technology, developing product offerings with global application, I believe there is scope for more innovative thinking in relation to the supporting tax and regulatory framework for the Green economy. For example there is merit in suggestions that some sort of ‘Green certification’ procedure could be introduced to determine what enterprises could avail of certain tax incentives in the Green domain. Any such proposals would of course require careful crafting to ensure they do not fall foul of EU state aid rules. An attractive expatriate tax regime is central to any such initiative. While Finance Act 2012’s new SARP does address
many shortcomings of its predecessor, it is still not competitive enough to attract the skills the financial services industry requires generally. If we are serious about becoming the global leader in Green finance, there is potentially a case for examining the introduction of an improved SARP specifically for expatriates coming into this sector. The SARP is not available where an employee is a new hire or in respect of individuals who are recruited abroad by an Irish company that does not have any foreign associated company. It is also only available where the employee’s salary is 75,000 or above. Given the Green sector is relatively new, the likelihood is that its development will come from new, innovative start-up companies, many of whose employees will not be very high earners but perhaps graduates etc. Yet, this is the very type of company which is excluded from SARP. Furthermore its lack of competitiveness in monetary terms with other regimes is a limiting factor in attracting service providers to the Green funds industry (relief for those earning over 100,000 is less than it was under the old regime). ----------------------Ireland really has the opportunity and the resources right now to capitalise on a funds industry that has grown through the recent financial crisis and create alongside it a global centre of excellence for Green finance generally. It will help greatly if some innovative tax measures can be taken and if focus can be given to tax incentives that ensure the renewable energy sector fulfils its potential to attract investment and grow, creating jobs and many spin-off benefits. Mike Hayes is a tax partner in KPMG and head of KPMG’s Energy and Natural Resources team.