The Irish budget, passed last month, will see pensions funds penalised by an estimated IR£25m ($37m)in 1999 with the unexpected abolition of Corporation Tax credits with effect from April of that year. Unlike the UK, however, funds stand to gain in the long term when the tax itself is reduced to a single 12.5% rate by 2006 for non-manufacturing companies and by 2011 for manufacturing concerns.
The IAPF had presented a submission to the finance ministry suggesting that the tax credit should be phased out in parallel Corporation Tax reductions leaving pension schemes in a 'no worse off' position, and was surprised when the credit was simply abolished.
The budget saw the halving of the tax credit on dividends paid out of profits taxed at the standard rate of tax with immediate effect. Credit on dividend paid on profits taxed at 10% will remain until April 1999. The IAPF believes that in 1999 pension scheme members will have to increase contributions by £25m or suffer a £25m reduction in benefits and is now concentrating its lobbying effort on ensuring that pension funds benefit fully from of future corporation tax reductions.
We are very disappointed that the minister didn't chose to phase out the tax credit but what we want to make sure is that the potential gains down the road find their way back to pension funds," says IAPF chairman Paul O'Faherty.
"It was quite a surprise, but there is general acceptance that we can't change this. We want to ensure that we reap the reward at a later stage."
In his budget speech, Charlie McCreevy, the Minister for Finance, reduced Corporation tax from 36 to 32% but did not set out a detailed timetable up to the 2006 and 2011 deadlines. Corporation tax would have to fall to 19%, on IAPF calculations, for the loss of tax credit to have a neutral effect."