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Impact on financial products

First let&#39s consider the proposals that could have a direct impact on the attraction or otherwise of financial products. The key proposed changes in this context are

– the abolition of the indexation allowance
– taxation of capital gains on a year by year basis (pre realisation).

Perhaps the greatest concern here is the Revenue&#39s expressed dissatisfaction with the definition of profits for corporation tax. We are reminded that the current tax code does not have a general definition of income or profits. Particular concern is expressed that capital gains and losses are usually only recognised on realisation or when they can be readily realised (in which case the assets are usually marked to market, ie. treated as if disposed of at a market value on a year by year basis).

As a result the Revenue feel that companies are encouraged to defer tax for as long as possible by holding assets and that tax payments are deferred which, of course, the Revenue treat as a &#34bad thing&#34. The Revenue also dislike the fact that the investor (in this case a company) has flexibility as to when to realise a gain or loss.

This obvious concern about tax deferral is a continuation of the trend expressed in the consultation document on offshore funds and is a worry.

The Government&#39s expressed solution is to tax gains on a &#34mark-to-market&#34 basis (as has been suggested for non-disclosing offshore funds). Fortunately, they do accept the difficulty of doing this where there is no ready market in the asset. However, where there is, as is the case for collectives and quoted securities, taxation on a mark-to-market basis (being aligned with accounts treatment) looks to be a favoured option.

One may ask why the Government appear to be considering adopting this principle for companies and not individuals. And why is a mark-to-market basis of taxation being proposed for adoption for capital gains (and possibly offshore non-distributor funds) and not non-highly personalised investment bonds underwritten by insurers?

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