Is the 41% Exit Tax Soon to be Scrapped? Michael McGrath to Review

[Djimi Traore]

I don't think it's something the media would catch on to if it's done properly. The vast, vast majority of Irish people don't have any comprehension that exit tax even exists and would tune out after reading 5 sentences.

 

[fistophobia]

The perception is that these products are for wealthy people only.

If someone sends me a private message, with a few bullet points, I will make a submission.
Whats the most effective sort of argument to make?

 

[Zenith63]

The perception is that these products are for wealthy people only.

If someone sends me a private message, with a few bullet points, I will make a submission.
Whats the most effective sort of argument to make?

I'd also be happy to make a submission if we could come up with a concise well reasoned piece of text. A separate thread might be best?

To me the argument should be that getting average people to invest their savings would help them close the wealth inequality gap that is opening up. ETFs are by far the safest and best regulated way to achieve this, but the complexity of managing the taxation puts people off and sends them to riskier investments. Perfect example was here a couple of weeks ago where somebody was asking about using some app like JuicyFruitInvestments to invest their money so they could avoid Deemed Disposal, pushing people to UK investment trusts like JAM etc is a similar but less scary example. Personally I think managing the CGT/Dividends/DWT/W-8BEN situation is similar complexity to DD/ExitTax and equally offputting to the average person, so the solution is not to just scrap DD/ExitTax but put in-place a structure where the average person does not have to worry about either tax regime.

 

[AJAM]

If someone sends me a private message, with a few bullet points, I will make a submission.

I'd also be happy to make a submission if we could come up with a concise well reasoned piece of text.

Feel Free to lift anything that I have written in this thread.
I personally like this one.

Disagree. We have an incredibly complicated Exit Tax system (even Revenue themselves can't issue clear guidance on what does and doesn't qualify). It's manifestly unfair both in the way it taxes you on paper gains instead of real gains and ignores losses. It's administratively a complete nightmare (trying to keep track of the 8 year rule for multiple buys). It discourages the majority of people from investing in the product (ETFs) best suited to them. And it takes in hardly any extra tax. Your argument is lets make it ever so slightly less sh*t. It needs to be scraped or at least only applied to clearly defined, select Life products.

 

[AJAM]

Assets in Ireland-domiciled ETFs top €1tn for first time
The total accounts for 68% of the nearly €1.5tn European market
According to article in FT

Assets in Ireland-domiciled ETFs top €1tn for first time

The total accounts for 68% of the nearly €1.5tn European market

www.ft.com

I find it disgusting that the Irish government gives the rest of the world a tax free ride on ETFs but hammers it's own citizens with 41% Exit Tax!

 

[joe sod]

Assets in Ireland-domiciled ETFs top €1tn for first time
The total accounts for 68% of the nearly €1.5tn European market
According to article in FT

Assets in Ireland-domiciled ETFs top €1tn for first time

The total accounts for 68% of the nearly €1.5tn European market

www.ft.com

I find it disgusting that the Irish government gives the rest of the world a tax free ride on ETFs but hammers it's own citizens with 41% Exit Tax!

Maybe if more light was shed on this in the international media to embarrass the Irish government to make changes. Maybe a headline in the financial Times

Irish domiciled ETFs a low tax haven for Europeans except if you live in Ireland.

 

[Duke of Marmalade]

Irish domiciled ETFs a low tax haven for Europeans except if you live in Ireland.

There is absolutely no issue with this. How Irish ETFs are taxed in Italy, say, is entirely a matter for the Italian authorities; how they are taxed in Ireland is a matter for the Irish authorities. It appears that Irish ETFs have a tax advantage through our DTA with the US in that I presume they can reclaim withholding tax. Doesn't seem enough to justify such dominance. ETFs, as with many investment products, are essentially an Anglo Saxon preserve and I presume our industry is the access of choice for these US/UK international giants to the EU market.

 

[joe sod]

ETFs, as with many investment products, are essentially an Anglo Saxon preserve and I presume our industry is the access of choice for these US/UK international giants to the EU market.

I doubt english speaking is much of a concern for ETFs or investment products generally, it not like they are a big pharma company or something producing a complex product where accurate communication among a large number.of people is important.
Afterall the IFSC houses many banks and funds all in the one complex, therefore each one has a few high paid specialists not vast army's of workers like for example intel .
In any case these ETFs were domiciled in Ireland long before brexit so domiciling in Ireland to access the EU market wasn't the major factor as they could have domiciled in any EU country or the UK . As I explained above you don't need a vast army of workers to domicile an ETF so employing those specialists in Italy or Germany wouldn't be a big issue. They are essentially brass plate operations in the IFSC and here primarily because of the tax advantages afforded to them by the Irish authorities

 

[Duke of Marmalade]

They are essentially brass plate operations in the IFSC and here primarily because of the tax advantages afforded to them by the Irish authorities

For sure, my instinct tells me this dominance has either a strong tax motivation and/or regulatory arbitrage. The DTA with the US is a wholesome advantage. But I find it hard to see the "Double Irish" or similar devices to those that allowed Apple to transfer price being available to the ETF industry. Yes, there is the 12.5% CT rate. Can you cite any other big tax advantage?
However, this is all quite unrelated to how Irish holders are taxed.

 

[denisoc1986]

Hi all, I recently contacted the finance minister on this and he provided some links where anyone who's interested can get further involved in the discussion. Here's his response and my original email is below for your reference:

Dear ..

The Minister for Finance, Mr Michael McGrath TD, has asked me to reply to your email dated 15 July 2023.

As you may be aware, the Minister for Finance published the Terms of Reference for a Review of the Funds Sector in Ireland ("Funds Sector 2030: A Framework for Open, Resilient & Developing Markets") on 6 April: Â
gov.ie/en/publication/153a5-funds-sector-2030-a-framework-for-open-resilient-developing-markets-terms-of-reference/

As per the Terms of Reference, and following on from the recommendation of the Commission on Taxation and Welfare, the Funds Review will examine, inter alia, the taxation regime for funds, life assurance policies and other related investment products. As the Review will consider issues relating to the taxation of ETFs, including those raised in your email, I would encourage you to participate in the public consultation exercise which is currently ongoing. You can contribute to the consultation via the online platform - consult.finance.gov.ie/en - or by posting your response to:

Funds Review,
Department of Finance
Miesian Plaza,
50-58 Baggot Street Lower,
Dublin 2

The deadline for submissions is 15 September 2023. A copy of the consultation paper is attached for your convenience.

While the Funds Review Team has been tasked with examining the taxation regime as it applies to the funds sector, it is important to note that this does not preclude the possibility of policy changes in advance of the outcome of the Review. Accordingly, I can assure you that your correspondence of 15 July will be considered by Department officials, independent of any submission you may choose to make to the Funds Review consultation.

Here's my original email:
Dear Minister,

I am a chartered accountant currently living in __ and have wanted to reach out for some time.

First of all thank you for your work, the recent years have been historically challenging and the resilience of the Irish economy as well as the fiscal management has been nothing short of impressive.

One area I believe you recently said was in review was the 41% tax and 8 year deemed disposal rule on ETFs/Index funds. I wanted to express my strong support for this.

As the only accountant in my friend group of 30/40 somethings, I’m often asked about their financial future. All would be considered successful in their fields, but outside of company pensions there is little for them to do with their savings with rates on savings so low.

Our generation has significant worries. Demographics making the future of state pensions uncertain. A.I. and technological change making future job prospects at risk. Inflation. Climate change.

Low cost ETFs are a simple way for people to look after their future, but due to the Tax system in Ireland, the benefits are largely reduced with the benefits to the Irish revenue minimal. I have provided an example below my signature showing the significant damage to the individual, with minimal benefit to Revenue as the 8 year rule interrupts compounding negating the higher tax rate with lower overall returns.

I believe this to be a simple and quick win for the government which can have life changing impact and security for the Irish middle class, as well as taking some pressure off the state pension.

Thank you again for your work and consideration of the above.

Example:
Assuming initial 100K invested, 0% dividends a year and 7% annual returns - net of all charges.

After 8 years:
Deemed Disposal Fund – €142,373
CGT fund – €148,118

After 20 years:
Deemed Disposal Fund – €239,870
CGT fund – €292,269

You can see the CGT Fund outperforms the DD fund in all cases but the difference is huge after 20 years, almost 60K in the difference.

Compare this to the difference in tax take for the Revenue.
The DD fund over 20 years will pay a total of €97,198 in tax (at 41% at 3 occasions, year 8, 16 and 20).
The CGT fund will pay approx. €94,700 in tax (at 33% once at year 20).
So in my example (Assuming 0% dividends a year and 7% capital gains - net of all charges) Revenue collects €2,498 extra in tax for the DD fund, but the investor ends up with €52,399 less

 

[MTB_FS]

Great email and thank you for posting.

I wonder have any of the large financial institutions such as Davy, Goodbody or any of the Life Companies completed a submission.

 

[Protocol]

Example:
Assuming initial 100K invested, 0% dividends a year and 7% annual returns - net of all charges.

After 8 years:
Deemed Disposal Fund – €142,373
CGT fund – €148,118

After 20 years:
Deemed Disposal Fund – €239,870
CGT fund – €292,269

You can see the CGT Fund outperforms the DD fund in all cases but the difference is huge after 20 years, almost 60K in the difference.

Compare this to the difference in tax take for the Revenue.
The DD fund over 20 years will pay a total of €97,198 in tax (at 41% at 3 occasions, year 8, 16 and 20).
The CGT fund will pay approx. €94,700 in tax (at 33% once at year 20).
So in my example (Assuming 0% dividends a year and 7% capital gains - net of all charges) Revenue collects €2,498 extra in tax for the DD fund, but the investor ends up with €52,399 less



Question: I presume this is simply due to the timing, as in the 41% exit tax at year 8 causes a big interruption to the effects of compounding?

 

[joe sod]

@denisoc1986 great post and email you sent in aswell, it has clearly shown the department how silly this deemed disposal policy is.
I think the government is finally picking up the vibes from the squeezed middle like yourself that they are sick of paying higher taxes for everything in comparison to their international peers. The tax bands have not been rising with inflation which means many more people are being brought into the high tax bracket by inflation alone not by increases in actual real incomes.
Varadker has shot down the tax strategy group when they advised not giving 1000euros tax break to the squeezed middle in the next budget and said that it would definitely be going ahead and that work needs to be rewarded.
So hopefully the government will progress on this aswell and turn a deaf ear to the voices in the department and financial industry wanting to maintain deemed disposal regime

 

[Duke of Marmalade]

Question: I presume this is simply due to the timing, as in the 41% exit tax at year 8 causes a big interruption to the effects of compounding?

Of course it is. @AJAM made this point before and I pointed out its irrelevance. The time value of money in the example is 7% p.a. or put another way if the Revenue were to invest its deemed disposal tax (collected at years 8 and 16) in said ETF it would earn 7% p.a. and that would eliminate the apparent anomaly.

Let's get real. There must be deemed disposal or something similar for accumulator ETFs. In the UK it is annual look through to the dividends which are then subject to the usual progressive taxation - in Ireland's case that would at a max be 52%. Pretty messy. An alternative is deemed disposal after a period of years. The Exit Tax could be progressive but for historic reasons it is an aggregate. The question is whether 41% is a fair aggregate between CGT of 33% (and of course the annual exemption) and dividend taxation ranging from 0% to 52%. Exit Tax rate began life over 20 years ago at 23% being 3% higher than the DIRT rate, itself an aggregate rate. 41% must be seen as some sort of emergency tax arising from the GFC and I would argue that a return to DIRT +3% is justifiable.

Submissions should be realistic. Making accumulator ETFs subject to CGT and only on realisation is a total non runner. Considering that death is CGT exempt, accumulator ETFs would simply be a vehicle for wealthy individuals to accumulate the estate for their beneficiaries totally tax free (albeit the beneficiaries would be subject to CAT).

 

[Djimi Traore]

Of course it is. @AJAM made this point before and I pointed out its irrelevance. The time value of money in the example is 7% p.a. or put another way if the Revenue were to invest its its deemed disposal tax (collected at years 8 and 16) in said ETF it would earn 7% p.a. and that would eliminate the apparent anomaly.

Let's get real. There must be deemed disposal or something similar for accumulator ETFs. In the UK it is annual look through to the dividends which are then subject to the usual progressive taxation - in Ireland's case that would at a max be 52%. Pretty messy. An alternative is deemed disposal after a period of years. The Exit Tax could be progressive but for historic reasons it is an aggregate. The question is whether 41% is a fair aggregate between CGT of 33% (and of course the annual exemption) and dividend taxation ranging from 0% to 52%. Exit Tax rate began life over 20 years ago at 23% being 3% higher than the DIRT rate, itself an aggregate rate. 41% must be seen as some sort of emergency tax arising from the GFC and I would argue that a return to DIRT +3% is justifiable.

Submissions should be realistic. Making accumulator ETFs subject to CGT and only on realisation is a total non runner. Considering that death is CGT exempt, accumulator ETFs would simply be a vehicle for wealthy individuals to accumulate the estate for their beneficiaries totally tax free (albeit the beneficiaries would be subject to CAT).

I'd have no problem paying tax on income within the fund in any given year. I lived in Australia and I assume it's similar to the UK but the fund has to declare income for the year and you can either take it as cash or reinvest it but you pay income tax either way. You get a personal report at the end of the tax year from the fund manager and you enter that amount in your tax return. Takes all of 5 mins.

 

[Duke of Marmalade]

I'd have no problem paying tax on income within the fund in any given year. I lived in Australia and I assume it's similar to the UK but the fund has to declare income for the year and you can either take it as cash or reinvest it but you pay income tax either way. You get a personal report at the end of the tax year from the fund manager and you enter that amount in your tax return. Takes all of 5 mins.

Yes, it is a totally viable method. But it would lend itself to progressive taxation. I think the industry would prefer an aggregate exit tax rate, provided it was a genuine compromise across the income bands - 41% is too high.

 

[Nermal]

Of course it is. @AJAM made this point before and I pointed out its irrelevance. The time value of money in the example is 7% p.a. or put another way if the Revenue were to invest its deemed disposal tax (collected at years 8 and 16) in said ETF it would earn 7% p.a. and that would eliminate the apparent anomaly.

Let's get real. There must be deemed disposal or something similar for accumulator ETFs. In the UK it is annual look through to the dividends which are then subject to the usual progressive taxation - in Ireland's case that would at a max be 52%. Pretty messy. An alternative is deemed disposal after a period of years. The Exit Tax could be progressive but for historic reasons it is an aggregate. The question is whether 41% is a fair aggregate between CGT of 33% (and of course the annual exemption) and dividend taxation ranging from 0% to 52%. Exit Tax rate began life over 20 years ago at 23% being 3% higher than the DIRT rate, itself an aggregate rate. 41% must be seen as some sort of emergency tax arising from the GFC and I would argue that a return to DIRT +3% is justifiable.

Submissions should be realistic. Making accumulator ETFs subject to CGT and only on realisation is a total non runner. Considering that death is CGT exempt, accumulator ETFs would simply be a vehicle for wealthy individuals to accumulate the estate for their beneficiaries totally tax free (albeit the beneficiaries would be subject to CAT).

There's nothing unrealistic about going back to the same rules that existed less than twenty years ago, and still exist in most other countries. We are the outlier.

 

[Duke of Marmalade]

There's nothing unrealistic about going back to the same rules that existed less than twenty years ago, and still exist in most other countries. We are the outlier.

And what rules are they?
The rules on life assurance where changed by EU decree in 2001 and there is no going back on that. The exit tax regime is very unlikely to be changed for life assurance, only thing up for grabs is the rate.
On accumulator ETFs there is a straight choice between a level playing field with life assurance or the UK regime of taxing dividend income as income on an annual look through basis. If Exit Tax is reduced to say 35% that may be the preferred route - maybe folk should be wary that they might get what they ask for.

 

[Babhdan]

accumulator ETFs would simply be a vehicle for wealthy individuals to accumulate the estate for their beneficiaries totally tax free (albeit the beneficiaries would be subject to CAT).

Well it would not be tax free but what exactly is the problem with wealthy people accumulating wealth? I really don't see the moral objection? Tax should not be about implementing social engineering to change society. Extremely presumptive that everyone shares your lefty views.

What is more, they can already do this if you are a business owner, a farmer or own dividend free stocks.

 

[joe sod]

I'd have no problem paying tax on income within the fund in any given year. I lived in Australia and I assume it's similar to the UK but the fund has to declare income for the year and you can either take it as cash or reinvest it but you pay income tax either way. You get a personal report at the end of the tax year from the fund manager and you enter that amount in your tax return. Takes all of 5 mins.

And that is logical , fair and simple you pay tax on the income whether it is payed out or rolled up. That's what most of the rest of developed world does. But the Irish authorities are not content just to take income taxes they also want to take unrealised capital gains aswell. However they would never dream of doing that with other assets like property which is the asset dejour of the Irish establishment