By Andrew Bushe
DUBLIN — Budget measures that close a loophole used by disgraced former Taoiseach Charles Haughey to avoid paying taxes on cash gifts siphoned to him through offshore accounts may also allow the wealthy to pass on their money free of taxation.
The changes could also have wide-ranging implications for emigrants sending home cash gifts or, if they die abroad, for their families, as well as for foreigners who come to work in Ireland and either die or inherit from a relative after they have been living here for more than five years.
It all arises from complex and substantial changes made by Finance Minister Charlie McCreevy to Capital Acquisitions Taxes under which gifts and inheritances are taxed by the state.
He also reduced the tax rate from 20 on the first £10,000, 30 percent on the next £30,000 and 40 percent thereafter to a flat rate of 20 percent.
Labor Finance spokesman Derek McDowell described the changes as "very worrying."
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"I think there are a lot of questions to be answered on this, though the Department of Finance have said it would probably have been next to impossible for the Revenue [Commissioner] to trace assets of people who had been domiciled as Irish but are non-resident in Ireland for tax purposes," McDowell said. "I don’t trust the minister on capital taxation and any doubts need to be cleared up. We need an awful lot of clarification on this.
"Whatever about the past, it is now beyond doubt that the legal position is that very rich people are in the clear provided they and their beneficiaries are outside the country."
Said Brian Bohan, former president of the Institute of Taxation: "Its basically a rich man’s budget overall. What the minister has done will give a tax holiday to a lot of wealthy individuals who can make sure they are not resident here at the appropriate times."
Up until this month’s budget, people paid CAT if either the person giving or willing the asset was "domiciled" in Ireland or the assets themselves were in the state.
If the person giving the gift or inheritance was not domiciled in Ireland, there was no tax — the so-called "Money from America" provision. This allowed a tax holiday for cash handouts from emigrants who were sending home money to help relatives cope during tough times.
A major political row blew up a year ago when it was revealed Haughey had used this provision to have a tax assessment from the Revenue Commissioner of about £1.8 million reduced to zero. The tax bill arose from cash gifts he received from Ben Dunne.
Haughey is understood to have appealed the assessment to an Appeals Commissioner — who was Taoiseach Bertie Ahern’s brother-in-law — on the basis that the last transaction transferring the money to him was through an off-shore company whose directors were not domiciled in Ireland.
Dunne’s gifts had been diverted through various companies to Haughey under a complex scheme operated by Haughey’s late financial advisor, Des Traynor. The Commissioner’s ruling is being appealed to the Circuit Court by the Revenue.
McCreevy has now changed the law so that tax will be due if a gift or inheritance comes from a person or goes to a person who is "resident/ordinary resident" in the state and the minister has dropped the "domicile" rule.
The rule that tax is due on all gifts or inheritances located in Ireland continues to apply.
While the minister has closed off the loophole used by Haughey, he appears to have opened up a Pandora’s box of other tax problems. These include:
€ Emigrants sending home modest amounts of money on a regular basis could in the future leave their relatives with a tax bill.
€ If an emigrant dies abroad and leaves his wealth outside Ireland — such as property, shares or cash — to family at home, the family could be liable to tax if it above the thresholds.
€ If wealthy people have taken up residence in tax havens such as Monaco, Switzerland, Liechtenstein, the Cayman Island, the Isle of Man and the Channel Islands and so long as they visit Ireland for less than 140 days in a year, they do no pay income tax. However, they could in the past have been regard as domiciled in Ireland and be liable to CAT at up to 40 percent. Now, if they can arrange for their Irish property to be held offshore in a tax haven-based company and their heirs or recipients of their gifts and inheritances outside the country are also offshore tax residents, they will pay no Irish CAT.
€ If a foreign national is sent to live and work in Ireland for more than five years and then inherits from his father and gets property held anywhere worldwide, he will be liable to Irish CAT on it and perhaps even inheritances taxes in the country where the asset is situated.
€ If the foreigner dies in Ireland after five years living here, then his worldwide assets will also be liable to Irish CAT for his heirs — even if the wealth and assets concerned were generated abroad many years ago and not connected with Ireland.