Figures from the Revenue Commissioners show that many of the State’s wealthiest people pay relatively little income tax here. We will look at the four main ways they achieve this. Analysis of the figures shows on average this group pays a lower percentage of tax on their income than higher-earning PAYE taxpayers. And many use tax arrangements, reliefs and allowances to declare extraordinarily low amounts of income for tax in the Republic.
Ireland has what is called a highly progressive income tax system – the burden rises sharply as income rises. The average taxpayer pays income tax at an effective rate of just over 16 per cent – meaning this is the percentage of their income taken in taxes.
But the bill rises sharply as you earn more. A taxpayer – either an individual or a jointly assessed couple – with earnings between €100,000 and €150,000 pays an average of 35 per cent of their gross income in tax and USC. The group earning between €150,000 and €200,000 pays almost 38 per cent, those earning between €200,000 and €25,000 pay an average of 40 per cent and those earning over €250,000 pay an affective rate of 42 per cent. So, in general, the better off not only pay more in case terms, but they pay at a higher rate.
That is until you get to the super-rich, when the the effective tax rate turns lower and a significant minority pay surprisingly little. The Comptroller & Auditor General, the State spending watchdog, examined the tax affairs of 334 high-net-worth individuals – those with assets in excess of €50 million – and what they paid in 2015. It found their effective tax rate was 39 per cent, at the upper end of the spectrum, but less than the average effective tax on all earnings of those with gross incomes of €150,000 or more , which comes in at about 41 per cent.
But the breakdown was even more remarkable. Some 85 per cent of the €473 million in income tax due from this group of 334 came from just ten taxpayers. This means that ten people paid not far off €40 million each on average in tax that year. Tax experts are surprised at this level of payment and speculate that this must have been due to the exercising of share options by senior executives in major companies, where gains are now generally subject to income tax. Who the “ super -tax ten” might be is now the subject of much speculation.
The flip side of this is that many of the rest paid very little, with one in four declaring incomes for tax less than the average industrial wage.
So how do the super-rich do it? There are the four key ways, but they share one similar characteristic. The reliefs and arrangements they are based on are all part of the normal tax system. But being very wealthy opens up new options, particularly for those who operate across different countries.
1. Go offshore
Many wealthy individuals operate across different jurisdictions, often choosing to be tax resident in a place where they pay less income tax. The price is a limit on the time they spend here. In tax terms this means that they would declare income for tax in the Republic relating to earnings here, which might only be a fraction of their total income. This is likely to explain the extraordinarily low amounts of income declared here for tax by some of the wealthiest.
There are two problems here . The first is a lack of transparency on what these people pay and a suspicion that, like major corporates, they exploit gaps and anomalies between different tax jurisdictions to cut their bills. Transfer of information between tax authorities is now stepping up to try to tackle abuses here.
The second, separate, problem is the use of offshore vehicles either in aggressive tax-avoidance schemes or for pure, illegal tax evasion. Many of the super rich have had the resources to set up opaque structures using trusts, for example, and Irish tax history is littered with examples of offshore evasion, most famously through the Ansbacher deposits: money hidden offshore in the Cayman Islands.
Others have avoided tax on selling their company by becoming resident abroad for a period – though tax rules in this area now generally require residency overseas for five years to do this – or by setting up complex offshore structures to try avoid paying tax on a company sale.
2. Claim a loss and write it off
Tax systems have to have some mechanism to allow people to balance off gains and losses to calculate what they owe for tax. This is most obvious in relation to capital gains tax, where people can gain or lose on investments. It can also be a factor in income tax.
Some of the low tax bills paid by the super rich are likely to relate to their ability to write off previous losses. For example, tax experts say many would have rental losses dating back to the crash. This would have occurred because during the downturn the allowable costs of borrowing to purchase rental properties and/or the rent received exceeded the return the investors were getting from their portfolio. Unlike many other tax reliefs, there is no restriction on the use of the relief by wealthy taxpayers as a write off against current rental income.
However the C&AG report shows that delicate line between tax avoidance and evasion in the area of losses – a factor also clear in the UK, where a number of the schemes involving celebrities having to pay up have been based on creating false tax losses.
In the Republic, a number of these schemes have also fallen foul of the Revenue. One involved 25 taxpayers with total “losses” of €550 million, with a potential reduction in capital gains tax of €110 million. Sources say that this involved an arrangement run by a prominent London investment bank would would create “losses” for investors on complex investments in foreign exchange products and forward purchases of government bonds. The Revenue tackled the scheme and has successfully argued that there was no economic reality behind the losses. A number of other similar schemes creating income tax or capital losses have also been successfully challenged.
3. Get money out of your company in a tax-efficient way
The self-employed have more options to manage their tax affairs than those on PAYE. Profits earned by their company – if it is trading – are taxed at 12.5 per cent. The owner is taxed as income is drawn down, but has options in terms of how to time the extraction of cash. Many of the self-employed would also use pension planning to try to reduce their bill. And in many cases investment in capital – such as plant or property for a business – creates a genuine reason to reduce taxable income. Capital allowances were the biggest vehicle used by the wealthy to cut their tax bill, according to the report.
Here again, however, we see how legal tax avoidance arrangements can slip into evasion, with methods of “ extracting” cash from a company a key focus of the tax advisory industry and an area where some schemes have crossed the line.
One, marketed by a prominent tax consultant, involved 100 cases with a tax at risk of €40.8 million. The Revenue has been challenging these cases and has so far collected €12 million from 43 taxpayers. This scheme involved people owning companies shuffling shares and the rights attached to them between companies, ending in the liquidation of a company with significant assets. The owners then tried to take cash out as a capital gain, taxable at 33 per cent at the time, rather than income, taxable at over 50 per cent. Another smaller schemes involved trusts being used for the same purpose.
4. Use a scheme
Tax schemes to shelter income, generally related to property , were the method used by the better off over the years to shelter income from tax. Many of these evolved from schemes to encourage development in certain run-down areas to become what were effectively tax dodges. Most of these schemes are now closed, though reliefs still apply to student accommodating, for example.
Significant tax has also been saved – and investigations are still ongoing – on so-called section 248 schemes which allowed people to get tax relief on borrowings made to invest in their business. The C&AG report shows Revenue investigations involving 50 cases here with €16.5 million tax at risk. Some schemes are believed to have involved borrowings being taken out in foreign currencies at artificially high rates. However, the ability to claim such borrowings against tax is now severely reduced as tax rules have tightened.
Other tax schemes remain . A string were used by the wealthy, according to the report, resulting in benefits to taxpayers averaging €167,000 each. These included a scheme allowing people to get relief on money spent on buildings or gardens of national interest, venture capital reliefs, maintenance allowance – relating to relief on money paid to an ex-partner – and trans-border relief, which is an allowance for tax paid overseas for people who are tax resident here.
* * * * * * * *
The bottom line is that the super-rich have more options. They can manage, in some cases, which country they pay their tax in and it is worth their while to pay for expensive advice to ensure they pay as little as possible on what they declare in the Republic. The famous US businesswoman and convicted tax dodger, the late Leona Helmsley, once famously declared that “only the little people pay taxes.” It would be an exaggeration to say that this was the case in Ireland, with many tax shelters closed off and higher earners paying the bulk of income tax. But many of the really wealthy are still using the options that remain to very successfully cut their tax bill. And the report shows that measures used to address this, such as the €200,000 domicile levy introduced in 2010, are having a limited impact.
Each Thursday Smart Money, an online subscriber-only column, looks at the big economic issues and how they affect you.
