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Tax Code

Dáil Éireann Debate, Wednesday - 24 March 2021

Wednesday, 24 March 2021

Questions (437)

Neale Richmond

Question:

437. Deputy Neale Richmond asked the Minister for Finance if he has considered reducing tax rates such as the exit tax rate and capital gains tax for young investors to encourage more young people to enter the market; and if he will make a statement on the matter. [14175/21]

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Written answers (Question to Finance)

At the outset, the Deputy should note that it is not possible to accurately estimate changes in behaviour arising from  for instance a change in the rate of exit tax applicable to investment products. These investments tend to be long term investments and any investment decisions in relation to them are driven by multiple factors and not solely by taxation.

The normal tax treatment afforded to Irish collective investment funds is that the funds invested are allowed to grow on a tax-free basis within the fund.  The income is taxed at the level of the investor rather than the fund, as is standard international practice.

In order to ensure that the appropriate tax is collected from Irish investors, funds are obliged to operate an exit tax regime and remit the tax deducted in this manner to Revenue. The exit tax rate applicable is 41%. This charge to tax does not apply in the case of unit holders who are non-resident as their  liability to tax on gains from the fund will be determined in their home jurisdiction. 

The broad rationale for exempting such funds from direct taxation is to facilitate individuals to invest collectively, without suffering double taxation (that is, taxation both within the fund and in the hands of the investor on distribution).  Most OECD countries now have a tax system that provides for neutrality between direct investments and investments through a Collective Investment Vehicle/Fund.

There is a charge to tax on Irish residents on the happening of a “chargeable event”. In order to prevent the deferral of a chargeable event (and therefore an exit charge) a deemed 8 year disposal rule was introduced. A disposal of units at market value is deemed to occur on the ending of an eight-year period following the acquisition of the units. Exit tax is payable on the deemed gain.  This rule ensures taxes are collected from funds and cannot grow without triggering a chargeable event indefinitely. On the ultimate disposal of the investment, any tax paid which arose as a result of a deemed disposal is allowed as a credit against any final tax liability on disposal.

In relation to capital gains, in general, gains on the disposal of assets are charged to capital gains tax (CGT) at the rate of 33%. The first €1,270 of chargeable gains of an individual in a tax year is exempt from CGT. 

My Department has undertaken research, examining the differential in savings and investments products subject to DIRT and those subject to the life assurance exit tax. The Tax Strategy Group 2020 paper identified a number of non-tax reasons, including age, as to why investors may prefer to invest in financial products subject to DIRT rather than life assurance products subject to exit tax (LAET), including: 

- investor fees/costs

- level of risk attached to  the investment

- the motivation for  saving/investing (and the ability to do so)

- the lower level of  complexity associated with such products.

Finally, as the Deputy will be aware, as with all taxes, both CGT and exit tax are subject to ongoing review which includes the consideration and assessment of the rate along with any associated reliefs and exemptions. CGT and exit tax policy and legislation are reviewed by the Tax Strategy Group as part of the annual Budget and Finance Bill process and are considered in the wider tax policy context.

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