Employers’ group claims regulation is a disincentive to investment and says scrapping it would bring in more tax
The rule means Irish investors are taxed every eight years on the supposed “gains” they have made from investment funds, even if they were never sold. This has proved to be a huge disincentive, and is contributing to households leaving €170bn in low or no-interest bank accounts.
Finance Minister Simon Harris told the Dáil last week that the cost of scrapping the “deemed disposal” rule might be €142m a year.
However, Isme chief executive Neil McDonnell said in reality, it would cost nothing, and the rule is actually denying the State “massive amounts” of CGT.
While the deemed disposal tax rate has been 41pc, recently reduced to 38pc in the Budget, CGT is 33pc, and is only paid on any profits made when an asset is actually sold.
“This punitive treatment is all the more inexplicable because it produces distortionary investment behaviours, and discriminates against indigenous exchange-traded fund [ETF] investors only,” Mr McDonnell said in a letter to the Department of Finance.
“Ireland is now the domicile for more than 90pc of newly issued ETFs in the EU, while Irish savers have practically no exposure to these products because of the toxicity of their tax and regulatory treatment.
“Because of this, any fiscal justification for the domestic tax treatment of ETFs is bogus. The Exchequer would be far better off taking CGT at 33pc from a few billion in indigenously held ETFs than it currently does from the approximately €700m invested in ETFs.”
Mr McDonnell pointed out that Isme does not represent anyone in the funds industry, and therefore has “no dog in the fight”, and is making these observations in the interest of employees of SMEs.
He said an ETF regime with the same tax treatment as equities would help create real wealth for Irish workers, and make a return to the Exchequer.
We believe that Irish savers should also be encouraged to invest currently idle savings into productive use
“Since the current tax and regulatory treatment of ETFs is demonstrably revenue-negative for the Exchequer, we are at a loss to explain the reason for maintenance of the regime,” he told the department.
“We believe that Irish savers should also be encouraged to invest currently idle savings into productive use, via a vehicle similar to the Isa account in the UK.”
Successive finance ministers have told the Dáil that the deemed disposal rule, which was introduced in 2006, is an anti tax-avoidance measure. It is designed to stop the indefinite roll-up of income and gains, leading to a loss of tax to the Exchequer.
However, because investors have to constantly calculate the notional gains they have made, and then pay tax on profits they have not actually received, both the complexity and perceived unfairness of the rule are acting as a disincentive.
The Department of Finance is planning to publish a “road map” early next year setting out a simplification of the tax framework in order to encourage retail investment.
Meanwhile, the European Commission has recommended to member states that they set up savings and investment accounts that are attractive from a tax point of view.
This is because the phenomenon of households leaving cash unproductively on deposit in banks is Europe-wide and not just affecting Ireland.
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