reshaping Ireland’s PERSONAL TAX SYSTEM
T
he Irish Tax Institute is the leading representative and educational body for Ireland’s AITI Chartered Tax Advisers (CTA) and is the only professional body
exclusively dedicated to tax. Our members provide tax expertise to thousands of businesses, multinationals and individuals in Ireland and internationally. In addition, many hold senior roles within professional service firms, global companies, Government, Revenue and state bodies. The Institute is the leading provider of tax qualifications in Ireland, educating the finest minds in tax and business for over thirty years. Our AITI Chartered Tax Adviser (CTA) qualification is the gold standard in tax and the international mark of excellence in tax advice. A respected body on tax policy and administration, the Institute engages at the most senior levels across Government, business and state organisations. Representing the views and expertise of its members, it plays an important role in the fiscal and tax administrative discussions and decisions in Ireland and in the EU.
contents Page
Chapter 1 Chapter 2 Chapter 3
Chapter 4 Chapter 5
Chapter 6 Chapter 7 Appendix
Overview
1
Reward work and productivity for workers in Ireland
3
Enhance Ireland’s international competitiveness in FDI
7
We must ensure Ireland can compete under the new global tax rules set down by the OECD
11
Strengthen our ability to attract influential talent and decision makers into MNCs
13
Help Irish SMEs and entrepreneurs to attract the best talent to expand their business
17
Bring to an end discrimination against the self-employed
19
Ensure Ireland can sustain a healthy and reliable tax base
21
Personal Tax & ‘The Global War on Talent’
27
Reshaping Ireland’s Personal Tax System – An Overview A pathway towards a more sustainable personal tax regime Ireland now requires a personal tax regime that meets the challenges of the international tax environment and the needs of both employers and employees in Ireland, while at the same time ensuring a sustainable tax base. The hallmarks of the Irish personal tax system: • Ireland has the second most progressive personal tax system in the OECD, measuring 179 compared to the OECD average of 125 • Taxpayers above the average industrial wage pay more tax than in other countries internationally, although Budget 2016 has helped to narrow this gap • Taxpayers on low incomes pay less tax than in other countries internationally • Personal tax rates are highly uncompetitive for attracting the necessary talent and decision makers to Ireland • Personal tax paid on higher salaries is close to those countries that are highest on the global rankings (Sweden and the Netherlands) • Personal effective tax rates are out of line with our global competitors • Our personal tax regime still discriminates against the self-employed with a 3% greater marginal rate • 29% of income earners are out of the personal tax net entirely • The top 1% of income earners are now estimated to pay 22% of all income tax and USC. The bottom 75% pay 19% of the total.
What does this mean for Ireland? • Ireland has a much more progressive income tax regime than all other 34 OECD countries with the exception of Israel. • It is important that a tax regime is progressive and that those who earn more pay more. However, unlimited progressivity should not be an end in itself – for example, tax rates of 90% would be extremely progressive but economically very damaging. There is a balance, or tipping point to be struck. • During the economic crisis, increases in personal taxes were proportionately much greater for those on middle and higher incomes and this was accepted at the time as the fairest option. However, as rates begin to fall back to more sustainable levels, it is important that job creators and those who are paying much higher effective rates than their international counterparts are not blocked from sharing in similar proportionate rate reductions. The current cap on rate reductions prevents this from happening. • The OECD BEPS project is now moving into implementation phase and MNCs and countries globally are vying for talent more than ever to support substance and profits in their territory. For smaller economies like Ireland, creating substance can be more challenging than for major economies like the UK with big cities, large markets and extensive workforces. We certainly do not want to discourage the best and brightest people from working in Ireland by imposing some of the highest income tax rates internationally.
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
1
‘‘
Issues with our personal
• These high rates apply at very low income levels by international standards. In figures published in June for the National Economic Dialogue, the top tax rate in Ireland was 52% at incomes of just above €70,000 but a rate of 51% (now 49.5%) applied to incomes of €33,800 which was just below the average wage. By comparison, the UK marginal rate which was 47% applied at 4.2 times their average wage and Spain’s marginal rate of 52% applied at 11.7 times their average wage. • A key focus over the coming years will be to attract back to Ireland the talented people who left during the economic crisis. The return of this talent will drive economic growth and substance for us, which is so important in a post BEPS tax environment. Uncompetitive personal tax rates are one of the key barriers to returning talent and growth.
The Irish Tax Institute has analysed the shape of the Irish personal tax system by; • Undertaking international research that allows us to compare the Irish tax system to that of competitor countries • Reviewing studies carried out by the OECD and other international bodies • Examining data from leading national organisations
tax regime have been widely expressed across many sectors in Ireland. This is very evident from: 1. the degree of concern being expressed about our personal tax regime, 2. the growing number of voices now sharing that concern, and 3. the consistency of the issues being highlighted for some time.
’’
Extensive analysis from a wide range of sources in Ireland in the past 12 months has identified a number of challenges with the existing regime: 1. Rewarding work and productivity for workers in Ireland 2. Our international competitiveness in FDI 3. Our ability to compete under the new global tax rules set down by the OECD 4. Our ability to attract influential talent and decision makers into MNCs 5. Our ability to attract talent in key areas, such as R&D, where there is an increased focus on local substance 6. Our ability to re-attract talent that left Ireland during the recession 7. The ability of new entrepreneurs to attract the right talent to expand their businesses 8. Discriminating against the self-employed 9. Ireland’s ability to sustain a healthy and reliable tax base
2
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
1
chapter reward work and productivity for workers in Ireland
3
Chapter 1: Reward work and productivity for workers in Ireland We know that high income taxes are very harmful to economic growth. Yet, above the average industrial wage, Ireland has some of the highest effective personal tax rates internationally. These very high taxes arise because of the combined low entry point to the top income tax rate and high marginal tax rates of up to 55% for the self-employed and 52% for employees.
More income in Ireland is being taxed at top rates than elsewhere internationally. It is a double hit which erodes people’s salary and purchasing power and has a negative impact on their productivity and working behaviour.
Main feature of income tax system in international context 70% 60%
Personal income tax & employee social security contributions (All-in rate), 2014 52% 46%
50% 40% 30% 20% 10%
Po rt u Sl ga ov l e Be nia lg iu Fi m nl an Sw d e Po den rt ug N Fr al et an he ce rla n Ir ds el an Sp d ai Ja n pa Is n r U Ca ael ni te na d da St at es Ge Ital rm y U a ni te No ny d rw Ki a ng y Au dom st ra li OE a CD Lu Gr xe ee m ce bo u Ic rg el an Au d st ri Sw Ko a itz re er a la nd Ch Po ile la Sl ov T nd ak ur Re key pu b M lic ex H N un ico e Cz w Z gar ec ea y h la Re nd pu b Es lic to ni a
0%
16 14 12 10
Threshold where taxpayer becomes liable to the top marginal tax rate as a multiple of the average wage in 2014
8 6
5.2
4 2
1.0
M e Po xico rt ug Fr al an ce Ch ile Sp ai U n ni te Ita d l St y at e I s Ge srae rm l a Gr ny e O E Sl ece CD ove Av nia er ag Ja e pa Ca n na U ni d te Ko a d Sl K re ov in a ak gd Re om pu b Tu lic Au rke Sw str y it al Lu zer ia xe la m nd bo u Fi rg nl an Po d Au lan st d ra Au lia st N ria or w Sw ay ed N Ic en ew el Ze and a De lan N nm d et he ark rla Be nds lq ui Cz ec Ire m h la Re nd pu b Es lic to ni a
0
(Source: Department of Finance1)
1
Distributional Impact of Growth Enhancing Tax Reform, Annual Taxation Conference, 11 November 2015
4
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
The Tipping Point – The Impact of Ireland’s High Marginal Tax Rates The Irish economy is small, export led and geographically on the edge of Europe and our personal tax model must be framed within these constraints. When tax rates become too high, they change peoples’ behaviour. Working overtime or taking on a promotion becomes less attractive, employers are reluctant to increase staff numbers because of the high cost, people who are mobile opt to leave for less penal tax regimes in other countries and those who are considering a return to Ireland find that they cannot afford to move back.
The Cap Effect means Ireland’s marginal rate still at 52%
While the top income tax rate was reduced by 1% for all taxpayers, the top USC rate was increased by 1% on incomes over €70,044. Therefore, any income over €70,044 could not benefit from the reduction in income tax rates. In essence, the gain from tax reductions was capped at €747. However, the marginal tax rate remained the same at 52% (and 55% for self-employed). The USC rate reductions to be introduced for 2016 are again targeted at incomes less than €70,044. This time the gain was capped at €902 and the marginal rate still remains at 52% (and 55% for self-employed). These rates are out of line internationally and reducing them below 50% has to be a competitive objective for us.
Ireland has the second most progressive income tax regime in the OECD: as incomes rise, tax rates increase significantly. With such a progressive tax system, when rate reductions come, the taxpayers who have been paying higher levels of income tax will benefit most. Those who pay a small amount of tax make smaller gains. The opposite scenario occurred during the austerity era with individuals on higher levels of income paying more tax at higher rates than those on lower levels of income. The personal tax changes announced in October 2014 capped the benefit of rate reductions on those earning over €70,044.
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
5
Budget 2016 – How much did people gain? €1,000
€902
€902
€902
€902
€902
€902
Reduction of tax liability €
€900 €800 €677
€700 €600
€527
€500 €400 €300
€377 €302
€200 €100 €– € € € € € € € € € € 30,000 35,000 45,000 55,000 70,000 75,000 100,000 125,000 150,000 175,000 Income Level €
6
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
2
chapter enhance Ireland’s international competitiveness in FDI
7
Chapter 2: Enhance Ireland’s international competitiveness in FDI Ireland is out of sync on personal tax with global competitors
Ireland vs Competitor Countries Globally Research carried out by the Institute on effective tax rates in competitor countries found that; • At low income levels, taxpayers in Ireland pay much less tax than they do in other countries
• At higher income levels, Irish effective tax rates climb steeply and become very uncompetitive
Employees at €18,000 salary Country 1 2 3 4 5 6 7 8
Effective tax rate at €18,000
Total employee tax and social security paid (€)
Difference in taxes paid compared with Ireland (€)
26.87% 19.00% 17.93% 17.79% 12.49% 8.01% 6.25% 3.33 %
4,836 3,420 3,227 3,201 2,248 1,441 1,126 600
4,236 2,820 2,627 2,601 1,648 841 526 -
Effective tax rate at €35,800
Total employee tax and social security paid (€)
Difference in taxes paid compared with Ireland (€)
36.26% 30.65% 27.03% 23.09% 19.93% 19.42 % 17.54% 16.19%
12,981 10,973 9,677 8,266 7,136 6,954 6,280 5,796
6,027 4,019 2,723 1,312 182 (674) (1,158)
Germany Spain Netherlands Sweden United States United Kingdom Switzerland Ireland
Employees at €35,800 salary Country 1 2 3 4 5 6 7 8
8
Germany Netherlands Spain Sweden United Kingdom Ireland United States Switzerland
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
Employees at €75,000 salary Country 1 2 3 4 5 6 7 8
Effective tax rate at €75,000
Total employee tax and social security paid (€)
Difference in taxes paid compared with Ireland (€)
43.81% 40.90% 35.45% 35.31 % 34.86% 28.33% 28.01% 24.41%
32,855 30,677 26,588 26,482 26,147 21,248 21,006 18,308
6,373 4,195 106 (335) (5,234) (5,476) (8,174)
Effective tax rate at €100,000
Total employee tax and social security paid (€)
Difference in taxes paid compared with Ireland (€)
44.68% 43.93% 40.84% 39.48 % 37.40% 31.75% 30.31% 26.70%
44,677 43,932 40,836 39,482 37,397 31,749 30,310 26,703
5,195 4,450 1,354 (2,085) (7,733) (9,172) (12,779)
Effective tax rate at €150,000
Total employee tax and social security paid (€)
Difference in taxes paid compared with Ireland (€)
47.14% 46.22% 44.06% 43.65 % 39.93% 36.51% 33.28% 27.95%
70,704 69,331 66,087 65,482 59,897 54,766 49,921 41,926
5,222 3,849 605 (5,585) (10,716) (15,561) (23,556)
Germany Netherlands Sweden Ireland Spain United Kingdom Switzerland United States
Employees at €100,000 salary Country 1 2 3 4 5 6 7 8
Netherlands Germany Sweden Ireland Spain United Kingdom Switzerland United States
Employees at €150,000 salary Country 1 2 3 4 5 6 7 8
Netherlands Sweden Germany Ireland Spain United Kingdom Switzerland United States
Effective tax rate = total personal tax paid as a percentage of total income
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
9
Ireland is in an increasingly intense global competition for FDI projects and personal taxes levied on talented project leaders are an increasing part of the competitiveness offering globally. “With respect to personal and capital taxation, Ireland’s competitiveness deteriorated over the course of the recession.”
While Ireland ranks 10th overall in INSEAD’s Global Talent Competitiveness Index 2014, Ireland ranks 55th in terms of the extent and the effect of taxation on attracting talent. (The UK is 22nd). (Source: INSEAD, Global Talent Competitiveness Index 2014, December 2014)
(Source: Department of Jobs, Enterprise & Innovation, Statement of Strategy)
Ireland vs Competitor Countries at €75,000 In Ireland you pay €335 more than in Spain
In Ireland you pay €5,234 more than in the UK
In Ireland you pay €5,476 more than in Switzerland
In Ireland you pay €8,174 more than in the US
Ireland vs United States at €75,000
10
US tax paid at €75,000
Irish tax paid at €75,000
€18,308
€26,482
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
3
chapter we must ensure Ireland can compete under the new global tax rules set down by the OECD
11
Chapter 3: We must ensure Ireland can compete under the new global tax rules set down by the OECD Substance and talent is key It is universally accepted that the new global corporate tax rules as a result of BEPS will lead to the taxation of profit being more closely aligned with substance. Large economies with big workforces and extensive markets have a natural advantage. The trend globally is falling corporate rates, so smaller economies such as Ireland will have to work even harder to be attractive to multinationals considering a range of investment locations.
Global Tax Policy Makers and Economists stress the importance of substance and talent “Ireland is going to have to seek real investment based on comparative advantages other than [corporation] tax” (Source: Catherine L. Mann, OECD Chief Economist and G20 Finance Deputy)
“The [BEPS] measures…..represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation and facilitate a better alignment of taxation with economic activity and value creation” (Source: Angel Gurría, OECD Secretary-General)
“Tax competition is something that the OECD has nothing against . . . having low rates when you have the real activity, where you attract the real people, where you attract the real activity, is not a problem” (Source: Pascal Saint-Amans, OECD Director of Centre for Tax Policy and Administration)
12
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
‘‘
“Ireland is going to have to seek real investment based on comparative advantages other than
’’
[corporation] tax”
(Source: Catherine L. Mann, OECD Chief Economist and G20 Finance Deputy)
The changing role of personal taxes Personal taxes will play a much greater role in the competitive offering of any jurisdiction; • When considering a potential relocation, personal taxes payable will be an important consideration for talented executives who drive investment decisions. • At current marginal tax rates of 52%, Ireland is well out of line with competitor locations and needs to urgently address this key strategic issue. • However, we have complete control over our income tax policy and the rates and regime that we offer people already working in Ireland and those who are considering bringing a project here. The new global rules do not restrict our ability to determine our income tax regime. However, the regime we choose must be fit for purpose and provide an attractive environment for key decision makers both internationally and at home.
4
chapter
strengthen our ability to attract influential talent and decision makers into MNCs
13
Chapter 4: Strengthen our ability to attract influential talent and decision makers into MNCs Leading global reports say personal tax rates key to future economic growth There are three broad economic themes underpinning tax reforms in the major economies around the world. One of these themes is
‘‘
to keep down rates of taxation on internationally mobile economic activities and productive resources so the tax regime attracts these resources and activities and contribute to the strength of the national economy.
’’
(Source: PwC and World Bank Group, Paying Taxes Report 2015, November 2014) In the past six months, many countries have emphasised the need for a focus on personal taxes to attract global talent. They include: • Sweden • United Kingdom • Australia • Singapore • Belgium • France
14
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
Also in the past six months, leading Irish organisations have highlighted the importance of the personal tax regime to Ireland’s competitive offering; • American Chamber of Commerce Ireland, (Pre-Budget Submission 2016, July 2015 and statement on the launch of ‘Ireland: A Global Centre for Talent’, December 2014) • Dublin Commissioner for Startups, (Response to Public Consultation Process by the Department of Finance, July 2015) • Enterprise Ireland, (Terence O’Rourke, Chairman Enterprise Ireland, Newstalk, 15 July 2015) • EY, (Kevin McLoughlin , partner lead of the EY Entrepreneur of the Year programme, Irish Times, 23 November 2015) • IDA Ireland, (‘Winning: Foreign Direct Investment 2015-2019’, February 2015’) • InterTrade Ireland, (Business Monitor Q2 2015, August 2015) • KPMG Ireland, (Irish Times, 27 July 2015) • National Competitiveness Council, (Ireland’s Competitiveness Scorecard 2015, July 2015) • PwC, (CEO Pulse Survey, July 2015)
Assignee Relief Programmes Many countries operate tax programmes which encourage high calibre skilled foreign executives to locate with them. Ireland is one such country which offers an income tax relief known as the Special Assignee Relief Programme (SARP). The regime is aimed at reducing the cost to Irish employers of taking skilled senior executives on assignment from abroad. Countries such as Sweden, the Netherlands, France, Belgium, Finland and Luxembourg all offer competitive tax reliefs for mobile talent such as this.
SARP provides an income tax exemption to such executives of 30% x (salary above €75,000). It is available for up to a maximum of five years. Ireland is challenged in the “war on talent” by similar tax reliefs offered by our competitors. Amongst the countries we researched, Sweden and the Netherlands both offer their own competitive tax reliefs for foreign executives. Ireland has the highest effective tax rate of the three countries for foreign executives.
Tax Due and Effective Tax Rates after Assignee Relief is given Tax Reduction available under assignee relief
Effective tax rate (after assignee relief)
Ireland (SARP)
€9,000
37.6 %
Sweden (Expert tax)
€21,968
33.1%
Netherlands (30% ruling)
€23,400
30.8%
Salary of €150,000
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
15
16
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
5
chapter help Irish SMEs and entrepreneurs to attract the right talent to expand their businesses
17
Chapter 5: Help Irish SMEs and entrepreneurs to attract the right talent to expand their businesses High performing staff are critical to the success of SMEs and start-up businesses. These businesses face two key challenges. 1. Personal Tax Rates: We have already outlined how Ireland’s personal tax rates are impacting take home pay and business productivity. 2. They often have limited cash to pay competitive salaries to key employees: These individuals could really make a difference to the success and growth of the business and are an essential part of the core team. Share based remuneration is key to addressing this issue.
Share Based Remuneration Share-based remuneration can play an important role in rewarding key employees at all stages of a business’ development. Share based employee remuneration can significantly reduce fixed labour costs and capital requirements, thereby providing significant cash-flow benefits to an enterprise, particularly a high potential start-up. It can also be a very attractive form of remuneration to employees in a growing business with the potential for the capital value of the business to significantly increase in value over time. Currently, the tax treatment of share-based remuneration provides no support to SMEs in Ireland who need flexible means for rewarding staff. The National Policy Statement on Entrepreneurship in Ireland, published by the Department of Jobs in 2014, has recognised the need for a tax efficient method of using equity to reward employees.
18
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
It noted that: “the current tax treatment of share options, however, is considered to be less competitive than that available in other countries and this is having a negative effect on the ability of Irish start-ups to attract world class talent”.
Share Based Remuneration – Real Challenges in the Irish System Typically an income tax liability arises for the employee when the shares vest (i.e. when share options are exercised). The result is a high income tax, PRSI and USC bill (typically of 52% of the value of the award) before the employee has sold the shares. In the case of start-ups and SME’s, the share will initially have a very low value which further compounds the problem. Staff are required to pay tax upfront on an entitlement to buy a share in the future which may or may not be worth much. Additionally, if the staff are fortunate and the shares do establish a value in the future, any subsequent profits made on the disposal of the shares are subject to CGT. The high CGT rate of 33% further reduces the attraction of share based remuneration for employees.
6
chapter bring to an end discrimination against the self-employed
19
Chapter 6: Bring to an end discrimination against the self-employed There are 3 main differences between the tax treatment of the employed and self-employed: Difference No. 1 Difference No. 2 Difference No. 3
The difference in marginal tax rates 52% v 55% (caused by the 3% USC surcharge) The differential between the PAYE Tax Credit and the Earned Income Credit The PRSI differential
Difference No.1 - The USC surcharge of 3% over €100,000
Difference No.3 – PRSI differential impacting low income earners
Once a self-employed person earns more than €100,000, they pay a 3% USC surcharge on income above that level. The surcharge is currently paid by 28,700 individuals.
• For a PAYE employee, no PRSI is paid if they earn less than €18,304 p.a. (€352 per week) – once earnings go over this amount, 4% PRSI is paid on all income (although Budget 2016 introduced a tapered PRSI credit for individuals earning between €18,304 and €22,048).
The extra tax that is payable by a selfemployed person on €120,000 is €1,700. Total income €120,000
Employee
Total income tax, USC and PRSI
€49,882
Selfemployed
€51,582
Difference
€1,700
Difference No.2 - The PAYE Tax Credit • A PAYE tax credit of €1,650 is available to all employees. • In Budget 2016, an Earned Income credit of €550 was introduced for the selfemployed and proprietary directors. • The difference between the PAYE tax credit and the Earned Income credit is €1,100 – this is a disparity that remains between an employed and self-employed person.
20
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
• For a self-employed person, no PRSI is paid if they earn less than €5,000 of income per annum. No PRSI credit is available for the self-employed. • Once earnings go over €5,000, 4% PRSI is paid on all income. A minimum of €500 must be paid. • At an income level of €18,303, a PAYE employee will pay no PRSI. • A self-employed person with an income of €18,303 will pay PRSI of €732 (per annum).
Self Employed As for entrepreneurs themselves – they are a small but strategically important minority of taxpayers who generate new business and drive the jobs agenda. We should acknowledge their contribution to our economic recovery and demonstrate our commitment to valuing this contribution by removing the tax discriminations that currently impact them. The additional 3% USC is a penalty on entrepreneurship - the marginal tax rate for the self-employed should be the same as the rate for employees.
7
chapter ensure Ireland can sustain a healthy and reliable tax base
21
Chapter 7: Ensure Ireland can sustain a healthy and reliable tax base Progressivity of the income tax system What is Progressivity? A progressive taxation system means that those on higher incomes pay proportionately higher rates of tax on their income than those on lower incomes. This is clearly the case in Ireland and is widely acknowledged to be so. “Ireland has the second most progressive income tax system in the OECD.” (Source: Minister Noonan, Department of Finance Taxation Conference, 11 November 2015)
“The OECD measures the progressivity of income tax systems by comparing the tax wedge at different levels of earnings. One measure commonly used by the OECD is the ratio of the tax wedge of individuals on 167% of the average wage and on 67% of the average wage. On this basis and as shown below, OECD estimates show that with a score of 1.79 Ireland had the second highest progressivity outcome of OECD member countries in 2014 and the highest among EU members.” (Source: Department of Finance, Taxation Annexes to the Summary of 2016 Budget Measures)
22
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
Taxpayers in numbers • There are 2.4 million income earners in Ireland. • 1.7 million taxpayers pay USC. • The personal tax base is shrinking again. 703,800 of income earners are out of the tax base now – representing 29% of all income earners. • Over 1.25 million taxpayers pay USC rates of 5.5% or higher. • A 3% USC surcharge is currently paid by 28,700 persons (selfemployed). • Income tax and USC receipts accounted for 41% of the total €41.38 billion tax collected in 2014. • Following Budget 2016, the top 1% of income earners are estimated to pay 22% of all income tax and USC collected. In contrast, the bottom 75% of income earners will pay 19% cent of the total.
OECD Progressivity Measure – Ratio of tax wedges at 167% and 67% of Average Wage, 2014 2.50 2.00
1.79
1.50
1.25
1.00 0.50 Israel Ireland New Zealand Mexico Australia Luxembourg United Kingdom Switzerland Portugal Greece Netherlands Iceland Finland Italy Norway Canada OECD – Average Sweden United States Korea Be;gium Spain France Slovenia Denmark Austria Turkey Germany Japan Czech Republic Slovak Republic Chile Estonia Poland Hungary
0.00
Source: Department of Finance Analysis of OECD Taxing Wages – Comparative tables
Progressivity Levels – Ireland vs Others
Average OECD Rate
125
VS
179
i The average rate of progressivity for OECD countries is 125. Ireland, in contrast, has a progressivity rate of 179.
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
23
The Role of the USC in the Tax Base A taxpayer’s first point of entry into the tax system is through the USC. When you remove taxpayers from the USC you remove them from the tax base. 2,405,000
Total number of income earners
703,800
The number of income earners who are out of the personal tax base now (paying no income tax or USC)
29%
The % of income earners who are out of the personal tax base now (not paying any income tax or USC)
Numbers in and out of the Tax Base post Budget 2016 Out of the Tax Base 703,800
In the Tax Base 1.7 million
Progressivity after Budget 2016 €70,000
€65,482
€60,000
Tax Paid
€50,000 €40,000 €26.482
€30,000 €20,000 €6,954
€10,000 €600
€0 18,000
35,800
75,000 Income Level €
24
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
150,000
Who will pay what in 2016?
1%
WILL PAY
€4.1 Billion
and also
75%
WILL PAY
€3.5 Billion
• Total income tax and USC receipts in 2016 are estimated to be €18.7 billion per government Ready Reckoner figures post Budget 2016 • The top 1% pay 22% of all income tax and USC • The bottom 75% pay 19% of all income tax and USC • The top 25% is everyone above €50,000 and they pay almost 81% of all tax and USC
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
25
26
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
appendix personal tax and “the global war on talent”
27
Appendix - Personal Tax & ‘The Global War on Talent’ What leading Irish figures are saying on talent and personal tax “A marginal rate of tax above 50% is a tax on talent and makes it more difficult to attract people to this country.” (Source: American Chamber of Commerce Ireland, statement on the launch of ‘Ireland: A Global Centre for Talent’, December 2014)
“Ireland must remain sensitive to the fact that this vital talent pool is in short supply globally and both employees and potential recruits are being attracted to jurisdictions where their total income tax and national insurance burden is lower – often significantly so.” (Source: American Chamber of Commerce Ireland: Pre-Budget Submission 2016, July 2015)
“The personal tax burden on skilled workers is now at a level which is making it challenging to retain critical technical and leadership talent within the jurisdiction.” (Source: American Chamber of Commerce Ireland: Pre-Budget Submission 2016, July 2015)
“There is a global war on talent” (Source: Dublin Commissioner for Startups, Response to Public Consultation Process by the Department of Finance, July 2015)
28
“In an internationally competitive environment, companies and people look at the total tax burden when deciding to invest or relocate. Ireland needs to be competitive in relation to personal taxation rates. In order to ensure that we can continue to compete to attract and maintain the best talent, the government should continue to reduce the personal tax burden, as budgetary arithmetic allows. The availability of talent will be the key differentiator for locations to win FDI in the future.” (Source: IDA Ireland, ‘Winning: Foreign Direct Investment 2015-2019’, February 2015)
“Skills and getting the right people are key characteristics of the fastest growing firms” (Source: InterTrade Ireland, Business Monitor Q2 2015, August 2015)
“Irish entrepreneurs are struggling to compete with large multinationals that can offer higher salaries and fringe benefits in the race for top talent” (Source: Kevin McLoughlin, partner lead of the EY Entrepreneur of the Year programme, Irish Times, November 2015)
“End the new third higher rate of tax above €70,000 which is causing problems in attracting high skilled staff”
“Ireland is a hugely attractive place in which to work and live; however, high rates of personal taxes kick in too early and do not help efforts to sell Ireland as a place to either stay in or move to.”
(Source: IBEC, Budget 2016 - Invest ambitiously, July 2015)
(Source: KPMG Ireland, Irish Times, 27 July 2015)
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
“Attracting talent home is also an emerging issue. Marginal tax rates for higher earning and internationally mobile workers are less competitive.” (Source: National Competitiveness Council, Ireland’s Competitiveness Scorecard 2015, July 2015)
“Competition for talent is global and intensifying. Despite significant increases in graduate numbers, skills shortages are emerging across multiple sectors— particularly, science, technology, engineering and ICT.” (Source: National Competitiveness Council, Ireland’s Competitiveness Scorecard 2015, July 2015)
“More third level qualified people are leaving the country in recent years than are arriving.”
“The real pressure for Ireland on personal tax kicks in once the salary levels go above c€70,000. The combination of a very high rate which kicks in at this salary level puts Ireland’s effective personal tax rates out of sync with our competitors. It is particularly relevant in an environment when skills are in short supply and where Ireland is trying to maintain our cost competitiveness.” (Source: PwC 2015 CEO Pulse Survey, July 2015)
“The Irish start-up scene, especially the tech entrepreneurs, they're really competing with the big guns of the world in trying to hire and employ [employees].” (Source: Terence O’Rourke Chairman Enterprise Ireland, Newstalk, 15 July 2015
(Source: National Competitiveness Council, Ireland’s Competitiveness Scorecard 2015, July 2015)
“Almost 70% of CEOs list the ability to access a highly skilled workforce as a critical factor to maintaining and/or increasing Ireland’s attractiveness as a location of choice for FDI.” (Source: PwC 2015 CEO Pulse Survey, July 2015)
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
29
Notes
30
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
Notes
RESHAPING IRELAND’S PERSONAL TAX SYSTEM
31
South Block Longboat Quay Grand Canal Harbour Dublin 2 Ireland T: +353 1 663 1700 F: +353 1 668 8387 E:
[email protected] W: www.taxinstitute.ie
