Michael McGrath (Cork South Central, Fianna Fail)
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88. To ask the Minister for Finance the rationale behind the budgeted yield of €80 million from the changing of the dividend withholding tax rate of 25% if the tax can be deducted from an income taxpayer's income tax liability; the amount of the €80 million anticipated to come from dividends paid to Irish tax residents; and if he will make a statement on the matter. [42851/19]

Paschal Donohoe (Dublin Central, Fine Gael)
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Irish resident companies are obliged to apply Dividend Withholding Tax (DWT) on dividend payments and other distributions made to Irish taxpayers. Dividends are treated as income and are ultimately liable to income tax at the individual’s marginal rate which is the highest rate of income tax to which they are liable. Universal Social Charge (USC) is also chargeable on the payments and in certain instances PRSI.

As I announced in my Budget 2020 speech, Revenue has identified a potential gap between the DWT remitted by companies and the income tax and USC ultimately payable by Irish taxpayers.

The rate of DWT that is currently applied is the standard 20% rate of income tax, but most individuals are also subject to the USC (0.5%, 2%, 4.5% and 8% rates).  When DWT was first introduced in 1999 and standard rated, there was no USC and the WHT rate has never been updated to take account of the USC.  As a result, the current 20% DWT rate does not cover the income taxes that are ultimately be due on a self-assessment basis so, while DWT has been applied to a dividend payment, a further amount of tax may be due.

To address this gap, I announced changes to the DWT regime. Firstly, an increase in the rate of DWT from 20% to 25% from 1 January 2020. Secondly, from 1 January 2021, Revenue will introduce a modernised DWT regime that will utilise real-time data, which will allow a personalised rate of DWT to be applied to each individual taxpayer based on their marginal rate.

The revised 25% rate is considered a reasonable combination of the 20% rate of income tax and the most common rate of USC which is the 4.5% that applies to income between €19,874 and €70,044.  In addition, it is likely that many of the taxpayers in question are also subject to the higher 40% rate of income tax.

The €80 million budgeted yield from the increase in the DWT rate from 20% to 25% is estimated based on prudent assumptions from payments in 2018 and to date in 2019. The yield is expected to arise on payments from Irish resident companies to Irish resident individuals in 2020 through reducing the potential gap described above between DWT withheld and the final tax payable by individuals.

From 2021 onwards, the modernized DWT regime arising out of the newly modernized PAYE system will eliminate this gap by ensuring all individual taxpayers pay the right tax at the right time.  It is important to note there is no proposed change to due dates for companies to return DWT as part of the modernised regime.

Michael McGrath (Cork South Central, Fianna Fail)
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89. To ask the Minister for Finance the list of flat rate expense allowances; the available allowance for each flat rate expense; the purpose of each allowance; the profession it is linked to; if the allowance is based on legislation; if his intention is to remove all allowances that are not based in legislation; the expected yield from such a change; if that yield was incorporated into budget figures for revenue raising measures; when he expects the changes to be introduced; his plans to amend legislation in order that some of the allowances are permitted; and if he will make a statement on the matter. [42852/19]

Paschal Donohoe (Dublin Central, Fine Gael)
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The flat rate expense (FRE) system is an administrative practice operated by Revenue, where both specific commonality of expenditure exists across an employment category and the statutory requirement for the tax deduction as set out in section 114 Taxes Consolidation Act (TCA) 1997 is satisfied.

The purpose of the FRE regime is to ease the administrative burden on Revenue and on employees in certain sectors by facilitating the automatic granting of a fixed tax allowance to cover allowable employment-related expenses, without the need for annual claims by every employee concerned.

The FRE regime developed incrementally over the last 40 to 50 years, and currently incorporates some 53 employment categories covering broadly 134 individual FRE allowances, relating to a wide range of employments and professions. The full list, detailing each of the available FRE allowances for 2019, is published on the Revenue website.

I am aware that over the past 18 months, Revenue has been conducting a comprehensive review of the FRE regime.  Revenue has advised me that the purpose of the FRE review, which involved engagement with relevant representative bodies, is to ensure that the expenses granted to each employment category remain justified and appropriate to modern day employments and work practices.  Each category of FRE allowance is being examined separately in the light of the legislative requirements.  I understand that the review may result in increases and decreases in several FRE categories, the withdrawal of the right to avail of the FRE allowance in certain categories and the introduction of new categories where appropriate.  Revenue have advised that a flat rate expense allowance can only be retained to the extent that there is a legislative basis to support the right to tax deductibility in respect of the expense.

Revenue has advised me that its FRE review is nearing conclusion, with an implementation date of 1 January 2020 for all changes to the FRE regime to make sure that employees in any one sector are not impacted on earlier than employees of another sector.  Revenue will be publishing a comprehensive list of all FRE allowances for 2020 in advance of the implementation date.

I am also advised by Revenue that it is not possible to accurately quantify the anticipated increase in tax revenue arising out of any abolition or reduction of FRE allowances, as the cost of such allowances vary depending on the particular circumstances of the individual recipients, for example, the extent of their income subject to tax and whether income is subject to tax at the standard or marginal rate. Moreover, a breakdown of the cost and numbers by reference to each employment category in which the FRE regime currently operates is not readily available. Prior to 2018, Revenue’s systems were not designed to identify FREs as a separate item from expenses generally.  However, the current (2018) Income Tax Form 11 and Form 12 tax returns now have specific questions on FREs, which will allow Revenue to segregate FREs from expenses claimed generally. However, final figures for 2018 are not expected to be available until mid-2020 to allow for processing of the data from income tax returns and cross referencing across Revenue operational systems. No account was taken of potential yield from changes to the FRE regime from 2020 when formulating revenue raising measures for Budget 2020. 

As the Deputy will be aware, the administration of the tax code is exclusively a matter for Revenue who are independent in the performance of their functions.  Any changes in practice to the flat rate expenses regime are therefore a matter for Revenue, but I understand that any withdrawal of the practice can only take place if Revenue are satisfied that there is no longer a legally valid basis to give the concession, after engagement with the relevant representative body acting on behalf of the various categories of workers. 

There has been no change to the general rule set out in legislation which says that all employees are entitled to claim a tax deduction under section 114 of the TCA 1997 in respect of an expense incurred wholly, exclusively and necessarily in the performance of the duties of their employment, to the extent which the expenses are not reimbursed by the employer.  Any changes to the general rule in section 114 TCA could lead to a considerable erosion of the income tax base, with potentially significant additional costs to the Exchequer, and are therefore not being considered at this time.

However, it is important to be clear that Revenue’s operation of the regime does not preclude any employee from making an individual claim for a tax allowance in respect of employment-related expenses, where those expenses meet the statutory requirement for such an allowance.  Therefore, while certain employees may no longer claim a deduction on a universal “flat rate” basis, they may still be able to still claim a deduction on a specific “vouched basis”.

At the same time, I expect that Revenue will implement the outcome of their review in their customary proportionate and fair manner fully cognisant of the impact on the individuals concerned, as they have done before on many occasions.