Introduction

Due to the scale of uncertainty surrounding the Brexit negotiations between the UK and EU, forward planning is very difficult at a national level and at a business level. The longer this uncertainty remains, the more volatility Ireland will experience in currency markets, investment, trade and confidence. Opportunities however, can be honed by Ireland now to reduce the impact of uncertainty and lay the foundations for prosperity on conclusion of Brexit. Reform of stamp duty policy on stocks and marketable securities is one such opportunity. If the right balance is struck on the stamp duty rate, this will help Ireland position itself as the natural successor to the UK as a destination of international financial investment. Other EU member states operate lower rates of stamp duty or its equivalent and are therefore in a better position than Ireland in the competition for international capital. Ireland is also in competition with the UK itself which operates a rate half that of Irish stamp duty. The UK may even reduce stamp duty further following its departure from the EU in a bid to retain international capital.

The biggest challenge for Ireland is commerce and the Government must take action now to limit the negative implications of Brexit on this country by ensuring that Irish commerce is competitive. That is why the CCAB-I is calling for stamp duty on share transactions to be reduced to 0.5%.

For the purposes of responding to this consultation, the CCAB-I presents the case for stamp duty rate reduction for Irish quoted companies in the context of Brexit. We have therefore focused on the questions pertaining to Brexit. We also make recommendations for stamp duty reform aimed at unquoted Irish companies.

Q: Whether Stamp Duty on share transactions continues to be justified as part of our overall taxation system

Investment capital is mobile and Irish companies are competing with enterprises worldwide for investors. Irish companies are at a serious competitive disadvantage because international investors view a one percent stamp duty on investing in Irish companies as a penalty that does not feature at such a high rate if at all in other jurisdictions.

Stamp duties impose high economic costs. Governments around the world are starting to reform this tax head. Studies by the OECD and by Deloitte who examined stamp duty reform in Australia1 find that the most efficient taxes are those levied on:

• a broad base of taxpayers thereby reducing the extent to which individuals or businesses decrease the consumption of one good or service in favour of untaxed substitutes and limiting the rate of taxation required to raise a volume of revenue; or
• goods or services where there is inelastic supply or demand, that is, those goods or services where either the demand or supply side of the market is relatively unresponsive to price changes, and therefore taxes have the least distortionary impact on behaviour; or
• immobile factors of production where market responses are inelastic and are less likely to move to untaxed forms of production.

Capital is typically mobile and taxes on capital therefore tend to distort economic activity by the greatest amount. It would follow that Ireland’s stamp duty levy of one per cent on stocks and shares on Irish quoted companies dissuades international investment.

Stamp duty exemptions are in place in Ireland for corporate reconstructions and are generally used by unquoted companies transferring shares on a merger, amalgamation or reconstruction of a group.

It can be a laborious and expensive task for an unquoted company and its shareholders to arrange all the steps required under section 80 SDCA 1999, for example, to achieve the exemption when exchanging shares as part of a reconstruction, amalgamation or merger.

Accordingly there is a case that stamp duty on the transfer of shares of unquoted companies should be abolished. This would save businesses time and professional fees and it would also save administrative costs incurred by Revenue in policing the exemption. There is no loss of tax revenue under this proposal as the exemption already provides for a nil tax liability.

Q: The extent to which Brexit related developments should influence policy on reducing or eliminating Stamp Duty on share transactions

Brexit will impact Ireland more than any other member of the EU2 due to the fact that we share a land border and due to our close economic ties with the UK. For example Ireland is the fifth largest destination for UK exports, Irish exports to the UK are worth more than 1.2 billion per month, over half a million Irish citizens live and work in the UK while a quarter of a million UK citizens live and work in Ireland. A number of practical issues arise for Ireland which impact stamp duty policy and collection.

The Irish system to settle shares and other securities traded on the Irish Stock Exchange is currently run by a central securities depository called CREST. CREST is owned and operated by a UK company called Euroclear UK & Ireland Limited which is based in London. Ireland is only member of the EU that does not operate its own central securities depository system. CREST also collects stamp duty on transactions which pass through its system. The UK will lose its passporting rights and access to the single market if it does not join the European Economic Area (EEA) on leaving the EU. This will mean that CREST will no longer be an appropriate vehicle for shares and securities traded on the Irish Stock Exchange and will also be defunct as a means of collecting stamp duty.

Therefore the Brexit debate is an opportune time for Ireland to reconsider our stamp duty policy in light of the fact that the means of collecting tax on shares traded on the Irish Stock Exchange must change.

Q: What direct impact Stamp Duty on share transactions would have on Ireland’s competitive position post-Brexit

Almost 5,500 UK firms use financial service passporting rights to do business in Europe, and over 8,000 European firms use passporting rights to provide services in the UK3. The EU is also the world’s largest economy with a nominal GDP of €18.5 trillion. UK trade with the EU accounted for 45 per cent of exports and 53 per cent of imports of goods and services in 2014, according to a House of Commons report. Therefore access to the free market is critical for UK businesses, many of whom are expected to relocate to other jurisdictions in Europe to continue in business within the EU.

The rate of stamp duty or financial transaction tax on share transfers in France is 0.3 per cent and the rate in Italy is 0.1 per cent. Belgium charges tax on the sale of shares at a rate of 0.27% subject to a cap in tax of €1,600 per transaction. No stamp duty is charged on the transfer of shares, bonds or other securities under German tax law. A company evaluating the best place to relocate in the EU following Brexit will not view Ireland’s one per cent stamp duty on share transactions as an attractive proposition and are bound to be enticed by the lower or nil rates of tax applied on share transactions in fellow member states.

Q: What alternative revenue streams from the financial services area or elsewhere could be considered to replace the revenue forgone in the event of a reduction or elimination of Stamp Duty on shares

Stamp duty on share transactions in Ireland in recent years account for a healthy €390 million to €400 million in tax revenue4. However, the data also shows that stamp duty revenue on share transactions is highly volatile. Revenue dropped from €609 million in 2007 to €171 million in 2012. This level of volatility makes government budgeting difficult and the situation could deteriorate even further as Brexit looms.

Increased commercial activity, stability in other tax revenues such as corporation tax, PAYE, VAT and income tax should replace the modest revenue foregone on reducing Ireland’s stamp duty rate on share transactions from 1% to 0.5%. If this rate reduction is not implemented, there is a very real chance that revenues under this tax head will plummet without any corresponding improvement under other tax heads.

We also note evidence from research work carried on assessing the impact of a financial transaction tax (FTT). Studies such as that carried out by the Swedish Central Bank5 suggest that there is no evidence that financial markets would function better with a FTT. The study also finds that an FTT would increase the cost of capital, which would reduce investment and thus lead to lower GDP and concludes that the negative effects of an FTT on economic activity could be considerable in relation to the expected tax revenues. We do not advocate the introduction of FTT in Ireland for these reasons.

Conclusion

CCAB-I call for a 0.5% reduction of stamp duty on share transactions of Irish listed companies. We also call for the abolition of stamp duty on share transactions relating to group reconstructions of unquoted Irish companies.

Reform of stamp duty rates on share transactions offers Ireland the opportunity to prepare for Brexit and position ourselves as a location for mobile investment. Stamp duty must be reduced if we are to have any chance of competing with our European counterparts.

Source: Chartered Accountants Ireland www.charteredaccountants.ie

1 “The economic impact of stamp duty: Three reform options for Australia”, Deloitte,

2 Brexit: UK-Irish relations, published by the House of Lords European Union Committee

3 Financial Conduct Authority data published in September 2016

4 Data from the Department of Finance in consultation paper “Review of the Application of Stamp Duty to Stocks and Marketable Securities of Irish Incorporated Companies”.

5 “Taxing fi nancial transactions”, Sveriges Riksbank Economic Review.