Dublin accounts for 60% of smuggled cigarette seizures in Ireland

Customs officers seized over 715 million smuggled cigarettes in Ireland over the past five years. Seizures in Dublin accouted for 437 million of these followed by the Border-Midlands-West where Customs discovered over 184 million illicit cigarettes. The remainder of the country (East, except Dublin, South-East and South-West) was the source of 94 million smuggled cigarettes between 2006 and the end of 2011.

Customs also seized over 29½ tonnes of tobacco with a corresponding loss to the Exchequer of €10.28 million.

To put this combined loss in a context – the prospective yield this year from the newly introduced Household Charge is €180 million. The loss of revenue to the Irish Exchequer from tobacco and cigarette smuggling in two years, 2008 and 2009, is comparable to the prospective yield in 2012 from the newly introduced Household Charge (€180 million).

The detections and seizures of smuggled cigarettes and tobacco is achieved through a combination of risk analysis, profiling, intelligence as well as the screening of cargo, vehicles and postal packages. Intelligence checks and random checks are made of retail outlets, farmers markets and private and commercial premises. Seversal blitz operations were conducted which uncovered over 34 million cigarettes and over 1,700 kgs of tobacco.

The European Anti-Fraud Office (OLAF) is very active in tackling this menace at an international level and is an important source of intelligence gathering in combating illegal tobacco smuggling globally.

Spanish Customs launched Operation "BALMAN" in February 2010 when specific intelligence about suspicious imports of cigarettes from China was received by OLAF and the Customs Service of the Czech Republic. Fast and accurate exchanges of information between OLAF and national authorities allowed investigators to track containers of counterfeit cigarettes from China to ports on the east coast of Spain, where they were diverted onto the illegal market. OLAF's involvement contributed to the seizure of six containers with more than 40 million cigarettes in Spain and Portugal, preventing financial losses to the EU budget and Member States of more than € 6 million.

In June 2010 the joint customs operation "SIROCCO" focused on deep sea containers loaded in China or the United Arab Emirates and arriving in the Mediterranean area. The objective was to identify consignments suspected of containing counterfeit or smuggled genuine cigarettes, as well as other counterfeit and illegal goods. It is estimated that the seizure of cigarettes alone prevented a potential loss of approximately € 8 million in customs duties and taxes in the EU.

Around 40 million cigarettes, 1.2 tonnes of hand-rolled tobacco, as well as 7,000 litres of alcohol and 8 million other counterfeit items including clothing, shoes, toys and electronics, were seized during the joint customs operations. Three suspected cigarette traffickers were arrested. OLAF provided logistical and technical support throughout the operation. It coordinated the operation from a Permanent Operational Coordination Unit based in OLAF’s premises in Brussels. The unit was staffed by customs liaison officers from nine EU Member States (Belgium, Denmark, Germany, Italy, the Netherlands, Poland, Portugal, Spain and Romania), Egypt, Morocco and Turkey, as well as a liaison officer from Europol.

Rampant cigarette smuggling forcing swingeing spending cuts on the Irish Government

The Irish Government intends to cut the Education Budget by €916 million between what it spent in 2010 and what it intends to spend in 2014. That sum is comparable to the exchequer revenue that will be lost as a result of cigarette smuggling even if Customs succeed in executing 50,000 seizures worth a further €1 billion in lost taxes.  Less than half of smuggled cigarettes are seized by the authorities according to anecdotal evidence and research.

Last year the Irish Government collected €4.6 billion in excise duties, of which over €1 billion was in respect of cigarettes. The tax component of cigarettes in Ireland is of the order of 80% of the retail price and the price of cigarettes in Ireland is among the highest in the European Union.

The ban on smoking in the workplace introduced in 2004 and the high price of cigarettes combined with rampant smuggling have been a deterrent on demand causing cigarette consumption of duty-paid cigarettes to drop by 41% since the smoking ban became law.

While total tax receipts from cigarette smokers have fallen by just 7%, the Irish Exchequer has lost an estimated €1.6 billion in exchequer receipts since 2004 as a consequence of cigarette smuggling, making this one of the most costly losses to the State. The European Union states are said to lose €10 billion per year as a consequence of the trade in illicit cigarettes.

Our customs authorities have undertaken more than 710 million cigarettes in more than 55,500 seizures in the past five years with an associated revenue loss to the State of over €290 million. But anecdotal and research evidence suggest that non duty-paid cigarettes is equivalent to 23% of total consumption.

Some of this is accounted for by the legitimate importation of cigarettes by bona fide international travellers and by immigrants from countries with a lower incidence of taxation on cigarettes.

The European Court of Justice banned Ireland, France and Austria from imposing State-controlled minimum prices.

The black market price of cigarettes in Ireland can be as low as 40% of the prevailing retail price.

But behind the 54,500 detections and seizures of illicit cigarettes in Ireland is an elaborate criminal complex that is heavily embedded in trafficking because the penalties are lower than is the case for involvement with other contraband and the profits large. The modus operandi ranges from ‘ant’ smuggling when small groups make frequent cross-border visits to large-scale container shipments and the 710 million cigarettes smuggled into Ireland in 2011 would have required seven fully laden 40-foot containers to transport them.

China, Russia and the Commonwealth of Independent States and some Baltic States are major source countries. Transhipment of large volumes before entry into the EU occurs in order to conceal the scale of activity with Middle East duty-free ports being a preferred venue.

Apart from Ireland, other sought after destinations in the EU are Germany, Spain and the UK.

There are various categories of smuggled cigarettes. Some are genuine but another category are known as ‘cheap whites’ – the term for cigarettes produced independently of normal manufacturers. Cheap white are typically cheap brands of reasonable and consistent quality, unlike counterfeits. The most popular ‘cheap white’ brand is Jin Ling, a brand that had not been heard of in 2005 but which is intended to mimic Camel cigarettes, which is manufactured in the Russian seaport enclave of Kalingrad, Ukraine and Moldova. This brand alone accounts for over 20% of the German illicit market. Five Russian illicit cigarette factories are said to have the capacity to make 24 billion sticks per year, equivalent to 7% of annual legal imports into the EU. This brand has no legal legitimacy in any part of Europe. It is distributed and sold exclusively through underground networks. The packs do not even feature the standard health warning on all normal packs.

The United Arab Emirates is another critical source of cheap whites from where they are shipped into Europe via Greece.

China is the largest source of counterfeit cigarettes of well known brands, such as Marlboro and this merchandise is typically shipped into Europe by sea.

There are also illegal cigarette factories in the EU, especially in Poland and some Baltic States with much of the output ending up in Germany. The tobacco is frequently sourced in Ukraine; while other factors are obtained in Lithuania and the manufacture takes place in Poland.

Last year a case was initiated in France that involved five countries: Hungary, Slovak, Czech, Germany and Italy against a large network operating from Ukraine to the United Kingdom. More than 150 personnel were deployed to support local police. This investigation uncovered the existence of a structured criminal organisation based in Ukraine which operated through front companies in several EU Member States. These companies established fictional commercial routes which concealed fraudulent activity using normal shippers. Transhipments were arranged in France through normal logistics companies. Illicit shipments were blended with legal cargoes of vegetables, fish, building supplies, peat moss, cardboard, paper etc. Key personnel were arrested in a coordinated and simultaneous police action on June 21^st 2011.

The financial loss arising from cigarette smuggling is borne by governments and taxpayers, not by producers or distributors who make their profit when the product is sold, not when it is taxed at the point of importation.

The response of Ireland’s Revenue Commissioners is to ‘target and confront those who do not comply’ with their obligations under tax and duty regulations. A key objective is to deter smugglers of tobacco products and to reduce the availability of contraband in Ireland. The overall approach includes:

• Educating the public on the negative aspects of contraband and media coverage of prosecutions. There were 14 convictions for customs offences in 2011.
• Ensuring that the legitimate trade remains compliant – excise duty collection; verification of sales figures; testing the legality of products sold
• Visible interventions – through more streamlined deployment of resources; the use of analytics, trend analysis of assessments.
• Improved collaboration with other State entities, including the Criminal Assets Bureau, Gardaí, shippers and others
• Prosecuting cases. There were over 200 formal Revenue criminal investigations in 2011

Philip Morris entered into an agreement with ten Member States of the European Union in 2004,that did not include Ireland, to fight cigarette smuggling and counterfeiting activity by making substantial payments to support additional measures and procedures. This also covered procedures to track and trace its cigarettes.

But smuggling is also sustained by other factors, including:

• The involvement of legitimate cigarette companies in smuggling activities. This has resulted in convictions in Hong Kong and Canada.
• The lack of more secure systems for transporting cigarettes giving smugglers access to large volumes of cigarettes free of all taxes and duties
• Price differentials. The highest prices in Europe are those charged in the UK and Ireland.
• Duty-free sales provides a venue for large volumes of cigarettes and smuggling opportunities
• Lack of resources to tobacco enforcement in most countries make it more difficult to eradicate smuggling
• Some countries tolerate smuggling more than others when enforcement is lax, penalties low, corruption widespread and smuggling is not deemed a serious crime.

Irish economy fragile despite higher tax receipts

Ireland’s Revenue Commissioners reported a €2.28 billion uplift in tax receipts for 2011, as a consequence of receipts in respect of the universal social charge and the public sector income levy.

That ought to be encouraging news except that the exchequer deficit in 2011 was over €6 billion higher than in 2010. 

It was in 2006 when Ireland last recorded an exchequer surplus.  Government expenditure since then has been €269 billion but tax revenue in the past five years were only €186.8 billion, leaving a cumulative exchequer deficit of €82.6 billion.

The reduction in exchequer receipt is reflect in lower VAT (-€4.75 billion), lower Excise (-€1.16 billion), lower Corporation Tax (-€2.8 billion), lower Stamps (-€1.79 billion) and lower Capital Gains Tax (-€2.68 billion).

Some €233 billion of the Government expenditure was voted while a further €36 billion was in respect of non-voted expenditure which covers costs such as interest on the National Debt – which reached €119 billion last month.

During the past five years the Government has reduced spending by a total €5.45 billion but spending in four departments, Health, Social Protection, the new departments of Public Expenditure and Reform and Health & Children caused an increase in spending of €6.55 billion.

The Eurozone convergence criteria requires the exchequer deficit to be no higher than 3% of the prior year’s GDP.  If this criteria had applied since 2007, the following circumstances would have applied:

Year	Actual Deficit €billion	Deficit permitted by 3% GDP Eurozone Criteria	Overrun
2007	1,618.5	5,697	-
2008	12,713.8	5,397	7,316.8
2009	24,640.9	4,815	19,825.9
2010	18,744.2	4,677	14,067.2
2011	24,917.1	4,620	20,297.1
TOTAL	82,634.5	25,206	57,428.5

Public sector employment has been reduced from 320,387 at the end of 2008 to 302,769 in mid 2011, a cut of 5.4% after employment in the Department of Social Protection was increased by over 1,200 to oversee additional expenditure of €5.2 billion.

If Ireland is to meet the convergence criteria and continue State spending at prevailing levels it would require a GDP of the order of €830 billion, 5.3 times larger than 2011 GDP.  If that was to be achieved our GDP would equate with that of Indonesia (population 237.6 million) ahead of that of countries such as Australia, Holland and Saudi Arabia.

But if expenditure is to be trimmed to comply with the Eurozone criteria the Government will be limited to spending of the order of €37 billion, over €20 billion less than it spent last year but close enough to its 2003 expenditure.

Higher corporation tax yield in Ireland than UK

Corporation profits tax accounted for a higher proportion of total tax revenue in Ireland last year than in the United Kingdom.

Corporation tax receipts in Ireland increased by 1.3% in 2010 to €3,944 million, accounting for 12.3% of Ireland’s total tax revenue of €31.91 billion last year. Corporation taxes provided 9.4% of total British tax revenue in the year to April 2011.

The British authorities collected a total of £446 billion in taxes in the year to April 2011. While total British tax receipts increased by 38.8% over the nine years ending April 2002 to April 2011, British corporation tax receipts increased by 30.4% in this nine year period

British corporation tax receipts in the year to April 2011 amounted to £41.9 billion. British corporation tax receipts increased by 17.3% from the years ending April 2010 to April 2011 compared to an average decrease of 12% in the previous two years.

British corporation tax receipts fell from £43 billion in 2008 to £35.9 billion in 2009 as company profits declined. The improvement in the most recent period maybe due to improved economic conditions leading to a recovery in corporate profits in Britain.

Today David Cameron is to address the Northern Ireland Assembly today and is expected to give the thumbs-up to the introduction of a lower rate of corporation tax rate in Northern Ireland. But the Northern Ireland authorities will have to deal with any overall shortfall in revenues that this might result in as a consequence of a reduction in the British Government block grant.

UK Tax Receipts

Year ending April	Total Tax Receipts £ Million	Corporation Profits Tax	CPT % Total Tax
2002	£321,768	£32,176.80	10.0%
2003	£324,526	£29,207.34	9.0%
2004	£343,609	£28,175.94	8.2%
2005	£371,045	£33,765.10	9.1%
2004	£397,930	£41,782.65	10.5%
2007	£423,674	£44,485.77	10.5%
2008	£451,063	£46,459.49	10.3%
2009	£439,103	£43,032.09	9.8%
2010	£408,509	£35,948.79	8.8%
2011	£446,502	£41,971.19	9.4%
Change from 2002 to 2011	£124,734 38.8%	£9,794.39 30.4%

Lacey banned by High Court for 9 years

The High Court yesterday (7 June 2011) disqualified Jim Lacey (61) of Grove Avenue, Blackrock, Co. Dublin, the former chief executive of National Irish Bank from 1988 to 1994 and former Fianna Fáil party insider , from serving as a director or officer of any company for 9 years on grounds of unfitness.

The court found that Lacey had been grossly negligent and that his conduct constituted a fundamental failure of governance. Lacey remained as a non-executive director of NIB from 1994 to 1997.  He had not acted on internal audit findings that had been brought to his attention.

He is the 10^th former executive of NIB to be banned and cases are outstanding against a further six. 

The extent of his unfitness was described in adverse findings of the High Court Inspectors Report on NIB which was published on 30 July 2004. The Report covered the period 1988 to 1998 when NIB was owned by National Australia Bank and, following an expose by two RTE journalists - not by the Central Bank.

The High Court appointed the Inspectors on Monday, 30 March 1998 to investigate:

• Bogus non-resident accounts and fictitiously named accounts were opened and maintained, allowing customers to evade tax.
  
• Clerical Medical Insurance policies were promoted as secure investment for funds not disclosed to the Revenue Commissioners. The total value of polices sold was around £48m and about 40pc of these exceeded £100,000.
  
• Special Savings Accounts had DIRT deducted at a reduced rate.
  
• Improper charging of both interest and fees to customers.  Over 6,500 NIB customers were reimbursed in 2001 for overcharging that was applied to their personal loan accounts in 1997, 1998 and 2000.

The Revenue Commissioners, as of 31 December 2010, have collected €60.14 million involving 312 cases of tax evasion as a consequence of special investigations following the NIB debacle.

Lacey resigned his two State appointments to the board of the Irish Aviation Authority and Dublin Docklands Development Authority as well as his position as a fundraiser for Fianna Fáil on Friday, 27 March 1998 “for personal reasons that should not be interpreted in any way as implying any impropriety by me in my previous role with NIB”

Lacey had been a close adviser to Bertie Ahern and had been appointed to Forum 2000, the Fianna Fail fundraising vehicle. Former Environment Minister Noel Demspey, who appointed Lacey to the DDDA in 1997 ‘accepted his resignation with regret’

When the High Court Inspectors Report was published the Head of the Financial Regulator, Liam O’Reilly – until last month a director of Irish Life & Permanent Plc. and member its Risk & Compliance Committee, stated on 30 July 2004 “The type of activity described in the High Court Inspectors’ Report is utterly unacceptable. As a regulator with a strong consumer mandate we are absolutely determined to ensure that there is no place for this type of activity in the financial services industry of today.

In light of this and other recent charging issues that have emerged, the Financial Regulator is currently engaged in an industry-wide exercise focusing on appropriate systems and controls to ensure that all credit institutions are fully in compliance with all relevant laws and requirements. The Financial Regulator is also of the view that in considering how to deal with regulatory issues, financial institutions must consider factors outside their specific legal and regulatory obligations. In particular, financial institutions should seriously consider their responsibility to maintain the trust and confidence of their customers. There is a clear message coming through - financial institutions that put short-term profits before customers will suffer the consequences. The cost of engaging in unacceptable behaviour has been proven to be very high, in both financial and reputational terms”

Mr. Justice Peter Kelly after disqualifying another former executive of NIB, Nigel D’Arcy, for 9 years stated in 2005 that "The edifice of banking is built on a foundation of trust. On the Inspectors findings there was a breach of trust. The operation was carried out over a period of years in a deliberate fashion"

Following the Lacey judgement, Paul Appleby Director of Corporate Enforcement stated  “The NIB/NIBFS Inspectors found that responsibility for the various improper practices which existed within the Bank rested with its senior management.

Last April, the High Court determined that Mr Lacey bore important responsibility for the continuation of the six practices criticised in the High Court Inspectors’ Report, and I welcome the Court’s affirmation of the significant duty which rests with company directors to secure their company’s compliance with its major legal obligations.

Today’s decision reminds directors of their responsibilities and of the personal consequences which may flow from a failure to take effective steps to correct non-compliance in their companies. The decision is also important in clearly demonstrating that we are serious about promoting and upholding high standards of corporate governance in Ireland.”

The current status of the nine disqualification actions originally initiated in 2005 is summarised in the following table. Seven of them (including Lacey’s case) remain before the Courts.

Disqualification granted by the High Court – No Appeal	1
Disqualification granted by the High Court – Respondents Appeal	4
Disqualification refused by the High Court – Appeal by Office of Director of Corporate Enforcement pending	2
Disqualification overturned by the Supreme Court	1

The effect of a disqualification order is to prohibit a person from being appointed or acting as an auditor, director or other officer, receiver, liquidator or examiner or being in any way, whether directly or indirectly, concerned or taking part in the promotion, formation or management of any company, or any society registered under the Industrial and Provident Societies Acts 1893 to 1978.

Lacey intends to appeal to the Supreme Court.

Irish financial regulation–two contrasting perspectives

Two contrasting perspectives have been offered on Irish banking regulation in the past week. A Blueprint for Ireland’s Recovery was the culmination of several months dialogue among 17 ‘Influential Persons’ that included several former board members of AIB and Bank of Ireland prior to the onset of the September 2008 financial crisis and the massive commitment of resources to bailout these banks. They argue that what Ireland needs is ‘an appropriate and proportionate regulatory environment’ but ‘we’ must ensure that ‘over regulation is not a deterrent to foreign direct investment’.

The Moriarty Tribunal Report published on 22 March makes recommendations with respect to banking regulation. It states that most of the information upon which the Central Bank, as regulator, should have acted was available to the Bank, or ought, on reasonable enquiry, to have been available to it when it supervised Guinness & Mahon.

The Moriarty Tribunal investigated  Guinness & Mahon in connection with off-shore subsidiaries in the Cayman Islands and the Channel Islands from 1976 to 1982. It was concerned with Central Bank’s concern that Guinness & Mahon was operating a tax avoidance scheme that was tantamount to facilitating tax evasion. Following special investigation by the Revenue Commissioners, prompted by the Tribunal investigation, the Ansbacher scandal subsequently yielded a cumulative €107.3 million in tax and penalty payments from 139 taxpayers by the end of 2009.

Moriarty states that the reason the Central Bank did not act was a culture ‘characterised by a marked degree of unwarranted institutional and regulatory timidity on its part and by a high degree of unacceptable commercial defiance’, on the part of those subject to regulation. Allied to these considerations and underlying these attitudes and approaches was the conviction and culture of all concerned that the attachment of publicity to improper banking behaviour , or the generation of controversy in respect of banking practices and banking standards in Ireland, might lead to the undermining of the Irish banking system. It was not that the Central Bank at the time lacked any requisite power to enable it to suppress the shamelessly improper operation of the Ansbacher accounts, but rather that it failed to use its ample regulatory powers.

The function of the regulator is the ‘regulate’ and the balance had swung toward under rather than over regulation. Strong action, not amounting to over regulation, on the part of the regulators, should be valued as a key element rather than a retardant, in the promotion of a healthy financial sector. It is extremely difficult to frame recommendations where what is proposed is a change of attitudes on the part of the relevant authorities and indeed in the overall commercial culture in which those authorities are bound to act. As recent events have shown, regulation if the key to the survival of the banking sector, so vital to the national economy

A culture where forthright regulation is valued, not merely at a time of financial stringency, but at a time when it might be thought to be an unnecessary brake on commercial activity.  Such a change can of attitude can best be encouraged by increased vigilance on the part of elected representatives.  These issues were addressed in the Tribunals first report published in December 2006 – but without apparent consequence, according to Moriarty.

Irish exchequer revenue down 19% but audits, assurance checks, special investigations and seizures yield solid results

The Revenue Commissioners collected 19% less tax in 2009 than in 2008 but they were activity level in other areas was consistently frenetic – as one might expect of a public sector agency that is second-to-none when it comes to high standards of efficiency and effectiveness.

The impact of the downturn on taxes in 2009 varied by tax heading.

 

Category	€	% Change v 2008
Customs	208,598,000	-15.9%
Excise	4,702,552,000	-13.6%
Capital  Acquisition Tax	254,258,000	-23.2%
Capital Gains Tax	541,849,000	-62.1%
Stamps	929,510	-43.7%
Income Tax (+ levy)	11,835,235,000	-10.2%
Corporation Tax	3,900,306,000	-23.0%
VAT	10,669,652,000	-20.6%
Other levies	1,213,000
TOTAL	€33,043,173,000	-19.0%

 

Tax Audits and Compliance Checks

Some 12,404 taxpayer audits in 2009 yielded €598.6 million.  The comparable figures for 2008 were 13,406  taxpayer audits that yielded €570 million

There were 361,299 assurance checks, 15,877 more than in 2008, that yielded tax revenue of €68.5 million (+€5.5 million)

Special Revenue Investigations

The tax yield from special investigations, €114.35 million was 109% higher than in 2008.  Special investigations embrace the evasion of Deposit Interest Retention Tax, Bogus non-resident deposit accounts, offshore assets, certain life assurance products, offshore Ansbacher accounts, Tribunals, National Irish Bank, Interest Reporting and certain trust and offshore structures used to conceal tax obligations.

There were 1,490 Special Investigations in 2009.  The cash cow in 2009, from a Revenue Commissioner perspective, was Interest Reporting when 1,214 taxpayers paid €55.3 million to the Revenue Commissioners, a liability they presumably would have preferred not to have arisen.

The cumulative yield from Special Investigations is €2,603.5 million from a total of 34,335 cases, including €41 million derived as a consequence of tribunals from 23 individuals.

 

Convictions

There were 453 convictions arising from Revenue matters in 2008 but this figure rose to 2,144 convictions in 2009, mainly attributable to persons convicted for the non-filing of returns.  There were 20 convictions for serious tax evasion in Ireland in 2008 and 10 such convictions in 2009.

 

Revenue Seizures

The Revenue Commissioners have been particularly successful in the seizure of illicit drugs, tobacco and other products.

Drug Seizures

 

	2008	2009	% Change
Cannabis
Number of seizures	2,441	2,166	-11.3%
Volume seized, KG	3,655	3,443.1	-5.8%
Value seized	€27,900,000	€30,200,000	8.2%
Cocaine and heroin
Number of seizures	76	39	-48.7%
Volume seized, KG	1,615	33.1	-98.0%
Value seized	€517,200,000	€2,300,000	-99.6%
Amphetamines, Ecstasy and other
Number of seizures	4,118	5,983	45.3%
Volume seized, KG	115	405.8	252.9%
Value seized	€2,300,000	€6,300,000	173.9%

The 2008 figures include a €500 million cocaine seizure off the coast of West Cork.

Tobacco Seizures

Last year was hectic as far as tobacco seizures are concerned!

	2008	2009	% Change
Cigarettes
Number of seizures	10,143	10,600	4.5%
Volume seized	134,800,000	218,500,000	62.1%
Value seized	€54,300,000	€92,100,000	69.6%
Tobacco
Number of seizures	1,094	1,171	7.0%
Volume seized – KG	2,965.0	10,451.0	252.5%
Value seized	€1,000,000	€3,700,000	270.0%

 

The Revenue Commissioners also made 34 seizures in 2009 of suspected criminal cash amounting to €1.35 million.

The Irish tax slump and Irish competitiveness

THE SECOND Budget that was presented to Dáil Éireann by Brian Lenihan TD, the Minister for Finance on 7 April was based on achieving a tax revenue target of €34.4 billion in 2009. Taxation receipts to the end of July were €18.68 billion. While this was 97% of the July target, a shortfall of €574 million was recorded.  This shortfall could be construed as a €13.5 billion shortfall if the 2007 tax revenues are the basis of comparison.

“Put simply, Irish tax revenues are close to 26% of GDP while voted government spending is 34% of GNP”.

To put this in context – total tax revenue in 2007 and 2008 was €47.5 billion and €40.77 billion respectively.

The 2009 target is therefore just €13.1 billion shy of the 2007 outturn so the shortfall must be seen against this background because this is what determined the government spending profile.

The make-up of the shortfall was spread across all tax categories, except excise, which is surprising given the severe downturn in new car sales. Excise is levied on transactions or events and not by reference to any time period. The main components of the €5.53 billion in excise duties in 2008 were:

Alcohol	19.24%
Tobacco	21.17%
Oil, gas and petrol	39.23%
Vehicle registration	20.36%

Sources of Shortfall

	€ Million
Customs	14
Capital acquisition tax	23
Capital gains tax	40
Corporation tax	75
Stamps	86
Income tax	185
VAT	447
Unallocated taxes	37
31 JULY 2009	-574

Business Sector Impact

Five business sectors that directly contributed €25.87 billion of the 2007 tax revenue of €47.5 billion are currently under pressure. Three banks, Bank of Ireland, AIB and the nationalised  Anglo Irish Bank have been provided with €11 billion this year by the taxpayer to prop up their capital base.

Corporation Tax

The 2009 target for corporation tax is €3.74 billion compared to corporation tax revenue of €5.06 billion in 2007.

Financial intermediation and manufacturing alone paid corporation tax of €3.93 billion in 2007

Income Tax

The 2009 target for income tax is €12.47 billion but unemployment and the number on the Live register is 30% higher than last March when these targets were established.

The large sources of income tax in 2007 were financial intermediation €1.17 billion, manufacturing €1.21 billion, construction €857 million, real estate related activities €1.62 billion and wholesale / retail – including the motor sector, €5.56 billion.

Income Tax from self employed

The total income tax derived from self-employed in 2007 was €2.3 billion and over 39% was derived from the self-employed in the real estate business.

Tax component of Irish agriculture

I have written several times in this blog about Irish agriculture, pointing out that while EU subsidies have remained at around €1.4 billion over the past several years, the slack has been taken up by the Irish taxpayer and, now, by those who borrow on behalf of the Irish taxpayer. Agriculture subsidies are the equivalent to 90% of output.

The contribution of agriculture to the Irish Exchequer in 2007, a time when land was changing hands at extortionate prices was €747 million out of a total tax take of €47.5 billion.

The make-up of this is interesting.

 

	€ Million
VAT	-€35,041
PAYE	50,775
Income tax – self employed	201,345
Corporation tax	24,933
Capital gains tax	501,095
TOTAL TAX FROM AGRICULTURE	743,107

Clearly, the sale of farm land to developers and the capital gains arising was the critical component of agricultural taxation in 2009.

The sector was reported to have employed 118,700 at the end of 2007. An average income tax payment of €427.75 per employee would suggest that there were very few prosperous people working on farms!

Value Added Tax

The value added tax paid in respect of professional services in 2008 was €33,541,000, a shade higher than the VAT paid in 2007.  You might think this encouraging.  But was it paid by a sector that was internationally competitive?

Competitiveness of professional taxpayers

The Annual Competitiveness Report 2009 has just been published by the National Competitiveness Council.  It discloses:

• Accountancy fees charged in Ireland by a major international accounting firm for a junior accountant in Ireland at approximately €115 per hour was significantly ahead of the same charge in London and Copenhagen and almost double what is charged in Singapore and my beloved Boston.
  
• The fee charge by a major legal firm in Ireland for a junior legal assistant per hour, excluding VAT was €300 her hour – significantly dearer than what is charged for counterparts in Boston, Maastricht, Copenhagen, London and Budapest.  This level of charge is almost 300% higher than in Singapore.
  
• The cost of an ad-hoc service site visit by an IT technician in Dublin, €180 per hour,  was the second most expensive of the locations benchmarked.  The comparable charge in Boston was €50, Budapest €40, Maastricht €35, Copenhagen €25 and Singapore €20.

I never cease to be fascinated by the passive language of government reports.  Imagine an infant sucking its thumb.  This Report advises “cost competitiveness is showing signs of improvement after years of deterioration” and it proceed to inform readers that “overall lending declined by 1.4% in the year to March 2009, compared to an annual increase of 12.5 per cent in the year to March 2008”.  Allelluia! 

But when you realise that non-government credit is close to €400 billion, would it not be more candid to state that borrowing is so high the only trend open is a reduction?  Get real.

“Are we at the stage where we must acknowledge that the restoration of credibility must precede the restoration of competitiveness?”

Who pays income tax in Ireland?

A total of 2,261,236 individuals were liable for income tax in Ireland in 2006 – a time of full employment when the labour force had reached a record high. 41% of these people, 926,100  earned less than €20,000 and were liable for very little income tax.  214 individuals earned more than €500,000 and they paid over €34 million in income tax.  85 individuals earned over €1 million and 25 of these earned over €2 million in 2006.

Income tax accounted for 27% of the overall taxation revenue of the Irish Government in 2006.  Curiously, the projected yield from income tax this year, €12.47 billion, is slightly ahead of the 2006 return – despite there being 418,000 on the Live Register compared to 155,000 in 2006.

The total gross income (before adjustments and allowances) in 2006 of 2,261,136 earners was €81,517,980,000 (€81.5 billion) on which income tax of €11,976,340,000 was charged.  Allowances, deductions, reliefs and exemptions reduced the gross income figure to €76,494,900,000.  Tax credits amounted to €8,537,700,000.  The average tax wedge on gross income was 14.7% and on taxable income 15.7%.  Gross individual income represented 46% of Gross Domestic Product in 2006.

The ‘Schedule E’ - (PAYE component) of gross income was €66,956,400,000 and the public sector element of this in 2006 was €16.71 billion – 25% of the total salary and waged component.

The following table summarises the demographic profile of taxpayers

Category	Number of taxpayers	€ Gross Income	€ Tax
Single males	774,968	19,763,200,000	2,735,810,000
Single females	665,682	14,801,160,000	1,745,000,000
Married, both earning	391,212	29,174,110,000	4,860,930,000
Married, one earning	354,072	15,720,150,000	2,416,630,000
Widowers	19,101	669,420,000	94,240,000
Widows	56,101	€1,389,950,000	€123,740,000
TOTAL	2,261,136	81,517,990,000	11,976,350,000

904,944 taxpayers are exempted from income tax on grounds of low income or having sufficient credits, reliefs and allowances. 

957,233 taxpayers pay income tax at the 20% rate.  Their average income is €32,446 per annum and their tax wedge is 8.8%

The balance, 398,969 taxpayers, pay tax at the 42% rate and their average income in 2006 was €89,477 per annum.

The latter group represent middle-income earners and they suffer a a higher tax wedge – summarised for each category as follows:

 

Middle Income Earners

	Average Income	Tax Wedge
Single males	€66,379	25.6%
Single females	€58,979	24.2%
Married, both earning	€120,607	25.1%
Married, one earning	€111,208	27.3%
Widowers	€75,285	25.1%
Widows	€67,743	23.5%

Lower Income Earners

Some 41% of Irish taxpayers, 926,100 persons earned less than €20,000 in 2006 – most of which was not liable to any income tax.

Higher Income Earners

I classify 88,214 persons (less than 4% of all taxpayers) who earned €100,000, or more, in this category.  An elite cohort of 8,905 earned more than €275,000.  But some of these earned significantly more as the average earnings of this subset were €665,678.

Tax Restrictions on High Income Earners’

Regulations under the Finance Acts of 2006 and 2007 introduced, with effect from 1 January 2007, measures to limit the use of certain tax reliefs and exemptions by high-income earners.

This applies to incomes in excess of €500,000 per annum and they are required to pay an effective tax rate of approximately 20% on what is defined as a combination of adjusted income and ring-fenced income.

There were 214 Irish taxpayers with incomes in excess of €500,000 in 2007 and they paid an effective tax rate of 20.8% on this income.  The Revenue Commissioners collected €34.15 million as a consequence.

The type of reliefs that these individuals traditionally availed of include reliefs applying to artists and patent income.

The range of income and the number of taxpayers effected is as follows:

 

Adjusted Income €	Number of taxpayers
500,001 to 650,000	55
650,001 to 800,000	39
800,001 to 1,000,000	35
1,000,001 to 1,500,000	48
1,500,001 to 2,000,000	12
2,000,000+	25