The Minister for Finance has announced that the tax credit attaching to dividends paid by companies will be abolished over a period of two years. Mr McCreevy said that in the ordinary course, this credit would reduce as the standard rate of corporation tax is cut but he has decided to accelerate the process.
A reduced tax credit will apply to dividend payments made to shareholders on or after December 3rd, 1997. The credit is being reduced from around one quarter to just under one eighth of the dividend and will be cut to zero from April 6th, 1999.
This means that investors receiving a dividend from a company paying the standard rate of corporation tax will see their effective tax bill rise from around 35 per cent to 41 per cent next year, Mr Donall Gannon, tax partner at KPMG said.
"They will be getting less net money out of their dividend income," he said.
Mr McCreevy also said the rate of advance corporation tax (ACT), which is payable by a company when it pays a dividend to shareholders, will be reduced and subsequently abolished in line with the phased abolition of the tax credit.
The changes, which will yield £24 million in 1998, £50 million in 1999 and £60 million in a full year, drew fire from the investment community.
The Irish Association of Investment Managers (IAIM) said it was very concerned by the "Big Bang" approach Mr McCreevy had taken to tax credits.
"The industry had hoped that the tax credits would have come down in line with corporation tax," the IAIM secretary general, Ms Ann Fitzgerald, said.
"We will have to look at this very carefully. It may have implications for the Irish equity market and it certainly will have implications for pension funds," she said.
The Institute of Taxation also said the changes would have huge implications for Ireland's life industry and pension business as well as wider investment decisions in Irish equities.