State loses €21.4bn each year through ‘tax expenditures’

The State loses approximately €21.4 billion in revenue each year in what are known as “tax expenditures”.

These include the wide range of reliefs and reductions allowable to individuals and families under income tax and other taxes, but also the generous tax shelters allowed to firms and foreign executives domiciled here.

University College Dublin economist Micheál Collins revealed the high level of revenue forgone through these reliefs and reductions at a meeting of the Budgetary Oversight Committee on Tuesday.

“The most recent list of tax expenditures from the Revenue Commissioners lists a total of 120 tax-relieving measures,” Dr Collins said.

“Of these, I would classify approximately 106 measures as discretionary and the total cost of these measures in revenue forgone is €21.4 billion per annum,” he said.

In many cases measures such as tax credits for individuals and PAYE workers were “regarded as worthwhile” and were viewed as part of the tax base, he said, and did not need to be reviewed.

While others were “discretionary” they also had long-standing policy support. These included tax relief on child-benefit payments and tax relief on nursing-home expenses.

However, Dr Collins said there were other discretionary measures, including mortgage interest relief and income tax reduction for high-income foreign executives, that were more controversial and may need to be assessed to evaluate their effectiveness and whether they should contain “sunset clauses”.

Referring to the various measures deployed by previous Irish governments to promote property-related activity, many of which were implicated in the financial crash 10 years ago, Dr Collins said Ireland had “effectively written the textbook on how not to do property supports via the tax system”.

Even a recent capital gains tax (CGT) exemption for investors who held on to to land for seven years, which has now been phased out, was linked to land hoarding in Dublin while at the same time chronic housing shortages were inflating prices.

People Before Profit TDs Richard Boyd Barrett said costs in certain areas were being inflated for the purpose of drawing down tax reliefs without much Revenue scrutiny.

Dr Collins acknowledged that in certain areas there was an ethos of not wanting to place an administrative burden on the recipients of certain reliefs, which meant collecting “as little information as possible” and this needed to be reviewed.

“Overall, given the importance of that revenue to support the running of the State, and the redistribution of resources, it is remarkable how little attention the policy-making system gives to the nature and stability of the overall taxation system,” Dr Collins said. Within that, tax expenditure represents a large part of the system, he said.

He recommended the committee request that the Department of Finance finalise a list of tax expenditure measures which are not part of the baseline or “technical functioning of the tax system” and and that they provide a report with the cost of these measures, in revenue forgone terms, to the committee each year.

Dr Collins will soon publish a report on the costs, distribution and policy options around the large amount of recurring annual tax expenditure granted to support private pension savings.

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Services growth at its weakest since 2013

A leading indicator for the economy recorded its slowest pace of growth since May 2013 in a warning sign ahead of Britain’s exit from the European Union.

The AIB Ireland Composite Purchasing Managers Index headline reading dropped to 54.2 at the start of 2019, down from 56.3 in December.

While a reading over 50 still signals an expansion, the survey showed that a dip in new orders had prompted service sector employers to cut back on headcount expansion, which recorded its slowest expansion in 10 months.

“It suggests that growth in the Irish economy is likely to slow this year, which is hardly surprising given the loss of momentum in the global economy in recent times,” said AIB chief economist Oliver Mangan.

Behind the slowdown in the pace of Irish private sector output growth were weaker rises in both manufacturing production and services activity. Both grew at their slowest rates in 10 and 68 months respectively.

Official forecasts are all for a decline in economic growth, with the Central Bank forecasting a 4.5pc expansion this year, with an agreed Brexit.

A cliff-edge Brexit in which UK leaves without a deal could cut that rate substantially, to just 1.5 pc, the Central Bank warned in its latest quarterly economic survey.

Still, even in the event of a no-deal Brexit, Ireland’s would still be at the better end of performance in the euro area where many of the largest economies are either in recession or flirting with it.

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No-deal Brexit could push us into recession in 18 months

Ireland’s robust economic performance faces an ‘existential threat’ from a no-deal Brexit, the stockbroking firm warned in its latest quarterly ‘health check’ on the Irish economy.

“We assume that the UK will leave the EU in an orderly manner on March 29, or more likely later, but the risks have risen over recent weeks of disorderly exit. A game of chicken is now in train between the UK and the EU,” Goodbody said.

“How this game plays out will determine whether the Irish economy continues to grow healthily over the next 18 months or potentially falls into recession.”

A no-deal Brexit would damage the economy by hitting our exporters with new trade barriers including tariffs, Goodbody said. It said there could also be a tightening of financial conditions (ie lending) which would remove fuel from the economy. Confidence would likely be hit too, putting downward pressure on spending.

It said, however, that this could be counteracted somewhat by British-based firms relocating here.

Separately, Goodbody said fears that US tax reforms introduced at the start of last year could hit foreign direct investment (FDI) have not been realised. But it warned that rapidly growing FDI firms are competing hard for talent, pushing up labour costs and potentially damaging Ireland’s overall competitiveness.

Accountancy firm EY also released its ‘Economic Eye’ report on the Irish economy, cutting its forecast for growth this year to 3.9pc. It said, however, that if a no-deal Brexit materialises it would reduce the forecast further to 2.5pc.

Professor Neil Gibson, chief economist for EY Ireland, said that although a no-deal Brexit would be damaging, Ireland’s economy would at least be approaching it from a position of relative strength.

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Housing market could be facing a hit in 2019

With mortgage approvals for first-time buyers down in December and new housing output in Dublin falling, the outlook for the housing market in 2019 is uncertain.

The Irish banks approved 2,908 new mortgages in December 2018 with a total value of €656m. There was an almost 6pc increase in the number of new mortgages approved compared to the figure for December 2017 while the value of new mortgages approved was up by 9.6pc.

On the face of it the December mortgage approval statistics would seem to indicate a housing market that was humming along nicely.

But a closer look at the key first-time buyers category reveals the number of new mortgages approved was down by 2.4pc to 1,363 in December 2018 compared to December 2017 while the number of buy-to-let mortgages approved fell by 16pc to just 100 over the same period.

Was December, traditionally a very quiet month in the housing market, merely a once-off or the harbinger of a downturn?

Those who argue that it was just a temporary hiccup point to the impact of the Central Bank’s mortgage lending rules, which restrict most new mortgage lending to 3.5 times the borrower’s gross income along with a 10pc deposit for first-time buyers and a 20pc deposit for all other buyers.

With the Central Bank refusing to budge on these rules there were reports in late 2018 of the banks urging borrowers not to draw down new mortgages until the New Year.

While the Central Bank rules probably didn’t help matters, other evidence also indicates that the drop in new mortgage approvals might be the start of something more serious.

Average Dublin house prices rose by almost 97pc from their May 2012 trough to October 2018 while house prices in the rest of the country rose by 78pc from between May 2013 and October of last year.

However, house prices in both Dublin and the rest of the country fell in November with a 0.7pc drop being recorded in Dublin and a 0.1pc fall in the rest of the country compared to October prices. Even if one looks at 12-month figures, which aren’t as prone to distortion by one-off factors, a similar picture emerges.

Average Dublin house prices were rising at an annual rate of 10.5pc in November 2017. This annual rate of increase had more than halved to just 5pc by November 2018.

It was a similar story in the rest of the country with the rate of increase slowing from 11.6pc to 8.8pc over the same period.

One of the main factors driving the post-2012 surge in house prices and residential rents was an absence of new housebuilding activity with very few new houses or apartments being built in the years following the 2008 financial crash. From a peak of 93,000 in 2006 new housebuilding had fallen to just over 4,500 by 2013.

Activity has begun to recover in recent years with 14,400 houses and apartments completed in 2017 with Goodbody Stockbrokers chief economist Dermot O’Leary estimating that almost 18,500 were built in 2018 and forecasting 21,700 for 2019.

Unfortunately, even last year’s greatly increased level of housebuilding activity was insufficient to meet underlying demand, which O’Leary reckons to be about 35,000 units a year.

And there are at least some signs that much of this increased level of housebuilding activity is concentrated on the upper end of the market rather than in the €275,000-€375,000 sweet spot that most first-time buyers can hope to afford.

As possible proof of this O’Leary calculates that 31pc of all new homes sold in the first 10 months of 2018 were for more than €350,000, up from 23pc in the first 10 months of 2017. In Dublin the preponderance of expensive new houses was even more pronounced with the proportion of new homes selling for more €350,000 rising from 38pc to 51pc over the same period.

O’Leary then applies the Central Bank mortgage lending rules to the Revenue Commissioners’ income distribution data and calculates that 67pc of couples can afford a home costing up to €287,000, 42pc can afford to pay up to €369,000, 27pc up to €450,000 and only 17pc more than €450,000.

“An increasing number of higher-value houses have come on stream in recent years. When you look at the income distribution you can see that this is only a limited cohort”, he says.

There are now signs that, in Dublin at least, even this modest increase in supply may be topping out with the latest report of the Government’s Housing Supply Task force showing that the number of new houses and apartments under construction in Dublin during the third quarter of 2018 fell by 20pc to just over 5,900.

Just another one-off or the start of something more serious?

O’Leary believes that the top end of the Dublin housing market “got ahead of itself” and that “we will definitely see prices at the top end of the market falling this year”.

But what of the rest of the market? What can first-time buyers expect in 2019? One of the factors driving the new housing market is the help-to-buy scheme under which first-time buyers can claim a tax rebate of up to €20,000 against the price of a new home.

As things stand the help-to-buy scheme expires at the end of the year, something that is already generating uncertainty for developers, lenders and buyers.

The Construction Industry Federation (CIF) is calling for the extension of the help-to-buy scheme. “If we don’t get certainty [on help-to-buy] buyers and banks will say that this is not a runner. Fifty per cent of new housebuilding activity has been enabled by help-to-buy”, says a CIF spokesperson. While it is widely expected that the Government will eventually extend the help-to-buy scheme, this can’t happen soon enough for the CIF.

Not alone is new housebuilding running at about half the level of underlying demand, most housebuilding is largely concentrated in the Greater Dublin area.

Last year the Government established Home Building Finance Ireland. It will lend a total of up to €750m to housebuilders and hopes to fund the delivery of up to 7,5000 new homes over the next five years.

“If that doesn’t work, the housing market will stagnate”, warns the CIF spokesperson.

Even if it does, more may need to be done – housebuilders may need assistance with site acquisition costs and utilities such as Irish Water and ESB will also have to raise their game, he says.

Despite these problems, the CIF remains optimistic about the overall health of the housing market, predicting “a strong year” in 2019 with 22,000 new homes being built.

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Automation poses threat to Irish jobs, new survey finds

Three out of four Irish people think automation and robots will cause unemployment, a new survey claims.

However, the iReach poll also says that most people believe robots will be good for the economy, estimating that the jobs under threat may exclude their own. The poll of 1,000 people found that just 16pc see “no threat” to employment in Ireland as advances are made in technology.

And 76pc of Irish people believe that job automation will contribute to a rise in unemployment here. However, 55pc view job automation as “positive for the Irish economy”.

Almost everyone (94pc) believes that “large-scale job automation” will occur at some point in the future, with just under half (46pc) predicting that it will happen “in the very near future”.

As to what kind of automation might come next, two-thirds of us doubt that robot receptionists or assistants on wheels will become common in hotels or retail outlets.

“Fifty-six per cent predict that this robotic way of running a hospitality business will not become a threat in Ireland, with the top cited reason that a high level of customer service trumps a robot, as people want the personal touch,” said iReach. Respondents’ experience of automated systems to date are dominated by self-checkouts (80pc), online check-ins (74pc) and ATMs (91pc).

Recent research from the consultancy firm McKinsey estimates that jobs such as food preparation will be almost entirely wiped out by robots by 2040. However, it predicts that jobs such as software development will remain immune.

The McKinsey research also predicts that job replacement will disproportionately affect men and the lower-paid.

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Isif pledges €10m-plus Brexit aid for companies

The Ireland Strategic Investment Fund (ISIF) may take equity stakes in Irish businesses to help them overcome Brexit, and is willing to inject more than €10m into individual companies.

Ireland’s sovereign wealth fund said it would use its capital to support companies with UK exposure. Isif director Eugene O’Callaghan said the fund would be more likely to make the €10m-plus investments directly, with smaller investments probably coming via other funds or partners in which Isif has invested.

“We will be looking to use our commercial capital to support businesses which have exposure to the UK. We are a provider of long-term capital, so the idea would be to provide the capital to give the companies time and the space to develop alternative products or markets to diversify beyond the UK,” said Mr O’Callaghan.

“Depending then on the nature of the business strategy, it might be equity, it might be debt. We will invest whatever capital is appropriate to the needs of the business at the time.”

Mr O’Callaghan said, however, that Isif would not be providing short-term capital to help businesses with a cash-flow issue pay bills right after Brexit.

No specific amount of money has been set aside for these investments, which will depend on whether there is demand for them.

“Brexit-related investments will be on a commercial basis and subject to Isif’s normal due diligence and approval procedures, which includes an assessment to ensure that the investment is compliant with State aid rules,” Isif said.

The EU Commission has previously said it would support Irish authorities with “pragmatic and efficient support solutions”, in line with EU State aid law.

Mr O’Callaghan also said that Isif has signed a deal with the World Bank to help Irish companies sell products into emerging markets.

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Don’t blow opportunity of a lifetime with buyer through lack of preparation

Q: I am meeting a buyer of one of the Irish non-food retailers. It could be a huge breakthrough in scaling-up my product, can you give me any advice?
A: It is great to get this opportunity, but you need to be aware that very often these meetings can be a once in a lifetime occurrence.

You may already have waited some time to get this meeting and certainly, if it doesn’t go well, you won’t be getting another one anytime soon. That means you have to be prepared to a very high level. Start by visiting this retailer’s shops so you have a full understanding of how they trade and particularly the dynamics within your product’s category. The buyer will expect you to have a deep understanding of this and expect you to be able to make suggestions as to how it could be improved.

As part of this process, you need to identify the gap for your product. There needs to be a compelling reason why the buyer will list your product. Remember, that in order for the buyer to list your product, they will have to delist someone else’s.

This is a big deal and no buyer really wants to do it unless there is a compelling reason to do so. Make sure that you understand the commercial demands that will be made by this retailer so that you can have done all your calculations and set aside the required margin expectations, supply chain costs, etc. If necessary, talk to another supplier of this retailer who might be willing to share information.

It is a good idea to prepare a short presentation that lasts no more than five or six minutes. Send it to the buyer in advance of the meeting and let them choose whether they want to read it ahead of time or allow you to present it at the meeting.

Make sure you arrive to the meeting early, bring along product samples and have a plan as to how you will support the product if you succeed in securing a listing. This is a highly competitive space and, as I emphasised in the opening paragraph, you have to be well prepared in order to enhance your chance of success.

Q: I run a medium-sized contract cleaning business servicing mainly offices in Dublin. I am worried about Brexit and wonder what additional steps I should take.
A: Your question is one that every single business is asking right now. The reality is that until the very last moment, it is probable that the outcome is not going to be clear. The government has instigated a series of roadshows around the country with all of the key State agencies involved. They are sharing some practical advice and tips.

The one piece of advice I am giving all businesses is to use Brexit as an opportunity to strengthen your business in general and to some degree anticipate turbulence in the marketplace.

For a business like yours, even if there was a lot of disruption in the market, the impact on your customers could be delayed and it could be a while before any negative impact is felt on services. You should take no chances and plan now a robust and accelerated strategy for 2019. Put workstreams into place to add new business, which would compensate for anything you might lose. Develop a roadmap for profit improvement and set out a series of actions that must be taken to improve the bottom line over the next 12 months.

Look at some form of diversification into a category close to yours. I see many of the contract cleaning companies now provide security services.

In summary, what I am proposing is a complete re-energising of your business which would see it becoming leaner, faster and more focused. Brexit or no Brexit, that can’t be a bad thing. We could all sit around with a crystal ball, but the reality is nobody can be sure. However, you can take control of your own destiny and potentially limit the impact of anything that happens in the marketplace.

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Thousands face fees as Permanent TSB changes conditions on free banking

Bailed-out bank Permanent TSB is changing the rules for those with its older current accounts, in a move that will mean thousands of them will end up paying fees.

The new terms and conditions will make it harder to qualify for fee-free banking.

Customers who do not qualify for free banking will have to pay €18 a quarter. This works out at €72 a year for using current accounts.

Changes will also see a reduction in interest paid for credit balances, and new overdraft fees.

The bank, in which the State has a 75pc holding, is imposing the changes on those who have legacy current accounts, and not to its flagship Explore Account which was introduced three years ago.

Explore Account has been the only current account the bank offers to new customers or to existing customers opening a new current account.

But large numbers of customers have remained in so-called legacy accounts, and the bank is now seeking to “standardise and simplify” how it operates these current accounts.

From the end of March people on the legacy accounts will have to pay the €18 quarterly fee unless they keep a balance of €2,500 in the account every day.

Up to now there have been various ways that customers were able to avoid the quarterly fee, such as keeping €1,000 in the account, having their salary paid into it, or having other savings or a mortgage with Permanent TSB.

The bank said there will be a new fee of €25 for setting up an overdraft facility or renewing one. Permanent is also cutting the interest rate it pays on credit balances in the accounts.

Currently the bank pays 0.25pc on balances up to €1,500, but the new rate will be just 0.01pc.

Two years ago Permanent TSB increased the charges on the legacy current account, pushing up the maintenance fee from €3.18 to €18.

A bank spokesperson said the changes will not affect customers over the age of 66, who will continue to benefit from free banking.

There has been a trend for banks to restrict free banking to those who meet strict criteria.

AIB customers have to maintain a credit balance of €2,500 to avoid fees, and Bank of Ireland requires a €3,000 balance.

Fintech competitors N26 and Revolut operate different models.

Revolut’s alternative banking services already appeals to more than 200,000 Irish users. It does not have a quarterly fee and does not impose a minimum balance. Instead, there is a 2pc charge on ATM withdrawals after the first €200 per month.

N26 does not require a minimum balance, and there is no administration fee. But a charge of €2 applies for using an ATM card more than five times in one month.

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Irish corporation tax faces new squeeze as OECD kicks off digital reform probe

Ireland’s corporation tax revenues are under threat as an international reform process kicks off in earnest.

The Organisation for Economic Co-operation and Development (OECD) is looking to change the way big technology companies are taxed.

It has now said it will consider moving to a system where companies will be taxed, at least in part, according to where users are based rather than where the company is based.

Ireland had opposed a similar plan at EU level, not least because a small population means it will reduce the tax take here – potentially hiking pressure to raise tax in other areas.

Corporation tax receipts have boomed here in recent years, putting the budget back into surplus. Losing those revenues would raise the prospect of having to borrow or raise other taxes to maintain spending.

“There’s a limited number of users in Ireland and [the proposal under consideration] would obviously benefit the much larger countries,” said Joe Tynan, head of tax and international tax partner at PwC Ireland.

“It kind of turns on its head everything that we’ve known before… if we were to tax Volkswagen based on where the cars were used I suspect you might find Germany wouldn’t be in favour of it.”

The OECD is a group of 36 countries of which Ireland is a member, alongside big economies like the US, Germany, Japan and the UK. Ireland has consistently said that the OECD is the correct venue for tax reforms, rather than the EU.

Though the process is not binding, for Ireland to refuse to implement a new system put in place would probably pose difficulties. If companies were being taxed one way in some of the bigger countries around the world, and another way in Ireland, that raises the prospect of ‘double taxation’, where companies are taxed twice for the same activities.

Given that the companies would want to continue selling their products to countries with big populations, Ireland could then see companies moving their tax residence out of here.

“The OECD’s going to go through a process, and we have tended to stick with the OECD,” Mr Tynan said. “If all those countries agree, because of our position as an international trading country we will have little choice but to sign it … it’s more than likely that we would feel obliged to sign up with that so that whether it’s a US company or a German company operating in Ireland, that they know what the rules are and there’s no double taxation.”

Finance Minister Paschal Donohoe was in Davos last week trying to rally support for Ireland’s consistently expressed view that companies should not be taxed according to where users are based. In high-profile public appearances both he and Taoiseach Leo Varadkar faced harsh criticism about Ireland’s tax regime, highlighting the negative perception that some countries have about our system.

The OECD secretary general said the Apple case, whereby EU Commissioner Margrethe Vestager found Ireland had given a ‘sweetheart’ deal to the iPhone maker, was an example of ‘gaming the system’. Both the Irish Government and Apple are appealing the ruling.

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Credit unions struggling to roll out scheme to compete with moneylenders, committee hears

THERE is no effective protection for vulnerable consumers from the activities of moneylenders, it was claimed.

The Oireachtas Finance Committee was told credit unions are struggling to roll out a scheme to compete with moneylenders because the State-designed scheme is loss-making and bureaucratic for them.

Just half of credit unions offer the ‘It Makes Sense Loans’ targeted at those on social welfare payments.

The scheme was put together by Government departments, credit unions and Social Finance Ireland to take on moneylenders, who have around 350,000 customers.

The credit union loans are approved quickly. They are short-term in nature, with loans available for a month, or two years.

There is a maximum interest rate of 12.7pc (annual percentage rate), compared with moneylenders that can charge up to 187pc, before collection charged are added in.

TDs and senators wanted to know why so few credit unions offer the personal micro loans.

Senator Rose Conway-Walsh, of Sinn Féin, said just two credit unions offer the It Makes Sense Loans in Mayo.

Head of credit union policy at the Department of Finance Brian Corr said there were a number of reasons that not all credit unions were offering the loan scheme.

With interest rates credit unions can charge capped at 1pc a month, the scheme is a loss maker for the locally-owned lenders.

Finance Minister Paschal Donohoe has proposed to allow credit unions to double the money interest rate they can charge.

Mr Corr said the higher rates are not a target and most credit unions would not increase rates.

He said the It Makes Sense Loan has an administrative cost and there are charges imposed, which make credit unions reluctant to offer them.

Chairman of the Credit Union Managers’ Association Tim Molan said credit unions were reluctant to embrace the scheme as they are competing against moneylenders which were not properly regulated.

“With moneylenders it is open season on the consumer. There is virtually no effective protection for people from moneylenders,” Mr Molan said.

He told the committee the Central Bank’s Consumer Protection Code is not applied to moneylenders.

He said moneylenders were free to call to the doors of people a week after they get a It Makes Sense Loan from a credit union.

Mr Molan said there needs to be a holistic legal and consumer protection approach taken to tackle licensed moneylenders.

Ed Farrell of the Irish League of Credit Unions said the typical It Makes Sense loan was small, at around €500. He said there was a heavy administrative burden on credit unions issuing these small loans.

In the period from November 2015 to April last year just 7,500 It Makes Sense loans were drawn down. This works out at just 3,000 a year. This is ten times less than those issued by moneylenders.

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