The Agenda for Tax Reform in Ireland –
Tax Expenditures
William H. Batt, Divisional Director,
Indecon International Economic Consultants
20th June 2008
Presentation Structure
Introduction
Description of Tax Expenditures
Issues re Review of Tax Expenditures
Examples and Outcomes from Indecon Review
Concluding Remarks
2
Introduction
 Context for Commission’s work
expenditures:
in area of tax
» Proliferation of various tax incentive mechanisms and
schemes over long period
» Increased focus on need to demonstrate value for
money in usage of public resources
» Absence – until recently – of timely information on
usage and costs relating to different tax expenditures
» Continued scarcity of information on outputs/benefits of
tax expenditures
3
Description of Tax Expenditures
Definition of tax expenditures:
“A tax expenditure can be defined as a transfer of public resources
that is achieved by reducing tax obligations with respect to a
benchmark tax, rather than by a direct expenditure” (OECD, 2003)
Tax expenditures, as distinct from public
expenditures, may take a variety of forms, including:
»Exemptions
»Allowances
»Credits
»Reliefs, including tax rate reductions
»Tax deferrals
4
Description of Tax Expenditures
A wide range of different tax expenditure
schemes/mechanisms have been employed in Ireland
Some (limited) examples of schemes/mechanisms
include:
» ‘Property-based’ and sector-specific taxation incentive schemes,
e.g. childcare facility scheme
» ‘Area-based’ taxation incentive schemes – e.g. Section 23
» Tax credits – e.g. R&D credits
» Pension contribution relief
5
Issues re Review of Tax Expenditures
 Introduction and operation of various tax expenditures over time
in Ireland have reflected variety of policy contexts and rationales
 Tax expenditures should be evaluated similarly to other public
expenditure programmes => value for money imperative and both
represent a cost to the taxpayer
 Evaluation/review of tax expenditures should therefore follow
Department of Finance’s guidance on evaluation of expenditure
programmes:
» Relevance
» Rationale
» Effectiveness
» Efficiency
» Impact
6
Issues re Review of Tax Expenditures
Particular challenges involved in evaluation/review
of tax expenditures:
» Tax expenditures are passive in nature
» Full costs of standard public expenditures typically known ex ante;
costs of tax expenditures are only known ex post => issue of take-up
impacting on costs
» Issue of information – absence, until recent change in tax return
requirements, of timely information on costs relating to different tax
expenditures
» Very little information available on outputs/benefits of tax expenditures
7
Examples and Outcomes from Indecon Review
Instructive to consider evaluation of tax expenditures by
reference to previous review work in this area
Detailed review of property-based tax incentive
schemes was completed by Indecon for Department of
Finance
This review considered 11 different property-based
schemes across number of sectors/areas including
tourism, medical, 3rd-level education, childcare sectors
8
Examples and Outcomes from Indecon Review
Useful, for purposes of this presentation, to focus
on 2 examples of schemes reviewed by Indecon,
namely:
» Capital allowances for Hotels; and
» Capital allowances for Childcare Facilities
9
Examples and Outcomes from Indecon Review
 Key components of Indecon’s approach to review are set out below
Approach to and Key Components of Indecon Review
Quantification of Level of Activity, Investment/Capital Expenditures and
Exchequer Costs
Evaluation of Gross Economic Costs and Benefits
Adjustments for Deadweight, Displacement and Opportunity Cost of
Resources Utilised
Analysis of Distributional Impacts of Benefits
Assessment of Alternatives and/or Refinements to Schemes
10
Examples and Outcomes from Indecon Review
Capital allowances for Hotels – key features:
» Capital expenditure incurred up to 31 December 2004 on any
building or structure used as a hotel or holiday camp qualified for
capital allowances
» Allowances of 15% of expenditures for first 6 years and 10% in
seventh year
» Reduction to 4% per annum over 25 years on expenditure
incurred after December 2004
» Finance Act 2004 provided extension of transitional
arrangements from December 2004 to July 2006
» Capital allowances ring-fenced and could be offset only against
rental income in case of individual, passive investors
11
Examples and Outcomes from Indecon Review
Number of significant changes in hotel sector in
Ireland:
» Considerable increase in room supply and quality since
mid-1990s (see overleaf), particularly in 4* category
» Substantial increase in planning application activity
coincident with incentive scheme
» Room and bed utilisation rates have fallen, however,
since 2000
» Average size of hotels has increased
» Evidence that incentive scheme has had significant
differential impact on supply and majority of hoteliers
believe scheme has contributed to over-supply in sector
12
Examples and Outcomes from Indecon Review
Total Number of Hotel Rooms - 1996-2005
120,000
100,000
80,000
60,000
40,000
20,000
0
1996
1999
2002
2005
Source: Gulliver database
13
Examples and Outcomes from Indecon Review
Estimated Total Eligible Capital Expenditure on Hotels and
Holiday Camps under the Tax Incentive Scheme
Detail
Estimated Value - €
Million
Total Cumulative Capital Expenditure – 2001-2005
664.4
Forecast for Future Capital Expenditure
977.0
Source: Indecon Calculations
14
Examples and Outcomes from Indecon Review
Exchequer Costs - Estimated Tax Revenue Foregone under the Tax
Incentive Scheme for Hotels/Holiday Camps
Estimate
€ Million
Capital Expenditure to Date
664.4
Est. Additional/Future Capital Expenditure
977.0
Gross Tax Revenue Foregone
195.8
Estimated Economic Benefits (adjusted for opportunity cost of
resources)
41.7
Tax contribution adjusted for Indirect Tax Revenues
75.2
Net Tax Revenue Foregone
120.5
Net Tax Revenue Foregone – adjusted for Deadweight
125.0
Source: Indecon calculations
15
Examples and Outcomes from Indecon Review
Capital allowances for Childcare Facilities:
» Allowances available for expenditures on or after 2
December 1998 on construction, extension or
refurbishment of approved childcare facilities
» 100% relief available in Year 1 or at 15% per annum for
first 6 years and 10% in Year 7
» Clawback provision if building ceases to be used as a
childcare facility within 10 years
» No termination date for incurring qualifying expenditure
on this relief
16
Examples and Outcomes from Indecon Review
Capital allowances for Childcare Facilities –
Activity:
» Evidence of positive differential impact of tax relief
scheme on supply of childcare places (+37%
between 1999 and 2004)
» However, demand has outstripped supply and
childcare costs have continued to increase
17
Average Cost of Places - € per Week
Examples and Outcomes from Indecon Review
€139
140
€126
120
100
€95
€85
80
60
40
20
0
2000
2005
Childcare Providers that have availed of the tax incentive scheme over the past 5 years
Childcare Providers that have not availed of the tax incentive scheme over the past 5 years
18
Examples and Outcomes from Indecon Review
Estimated Total Eligible Capital Expenditure on Childcare Facilities
under the Tax Incentive Scheme
Detail
Estimated Value € Million
Total Cumulative Capital Expenditure – 2001-2005
30.7
Forecast for Future Capital Expenditure (based on planning
applications in 2005)
21.2
Source: Indecon Calculations
19
Examples and Outcomes from Indecon Review
Exchequer Costs - Estimated Tax Revenue Foregone under the Tax
Incentive Scheme for Childcare Facilities
Estimate
€ Million
Capital Expenditure to Date
30.7
Est. Additional/Future Capital Expenditure
21.2
Gross Tax Revenue Foregone
8.6
Estimated Economic Benefits (adjusted for opportunity cost of
resources)
7.7
Tax contribution adjusted for Indirect Tax Revenues
3.5
Net Tax Revenue Foregone
5.1
Net Tax Revenue Foregone – adjusted for Deadweight
5.7
Source: Indecon calculations
20
Examples and Outcomes from Indecon Review
Number of general policy recommendations for
future operation of property-based schemes on
were issued:
» Increase requirements for disclosure of key information to
Revenue and the Exchequer by investors/promoters
» Decision on any new incentive schemes should be informed by
full appraisal of likely costs and benefits
» Option of direct public expenditure rather than tax reliefs should
be considered
» Need to specify defined lifespan for any schemes introduced
» Consider potential cap on total annual allowances which can be
claimed by any one individual (distributional impacts)
21
Examples and Outcomes from Indecon Review
Specific recommendations re Hotels and Childcare
schemes
» “There should be no further extension of capital
allowances for hotels and holiday camps for projects
which have not lodged a full and valid planning application
before 31 December 2004”
» “Capital allowances for childcare facilities should continue
subject to certain amendments”
22
Concluding Remarks




Large number of tax expenditure-based schemes/mechanisms
have operated in the State
Increasing emphasis on demonstrating value for money and
absence of information costs have prompted review and
evaluation
Overall, while many schemes have generated benefits, Indecon
analysis indicated that schemes, with limited exceptions, have
served their purpose
Key issue of whether direct public supports would, in majority of
cases, represent more efficient, effective and targeted usage of
scarce resources
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Tax Expenditures – William H. Batt - The Foundation for Fiscal Studies