Deloitte publishes its view and predictions for Budget 2018
Government should focus on Brexit proofing the economy, enhancing Ireland’s competitiveness, and positioning Ireland to seize new business opportunities, according to Deloitte.
Housing situation, left unchecked, will become binding constraint on Ireland’s economy.
The Government should be focused on Brexit-proofing the economy in Budget 2018 to provide resilience, enhance Ireland’s competitiveness, and position Ireland to take advantage of new opportunities, according to Deloitte’s pre-budget report which has been published today.
However, there is a critical need for investment in housing, infrastructure and education. This investment is required to improve Ireland’s competitive climate so it can attract local and international talent to live and work in Ireland, remain an attractive inward investment location, as well as to ensure Irish business and entrepreneurs can grow and scale their business from Ireland. The time is now to focus on these imperatives to ensure there is sufficient capacity for future economic growth and maximising opportunity.
A number of recommendations are made throughout this pre-budget report as to how these issues can be addressed, and Deloitte gives predictions about what the Government might do on budget day itself.
Lorraine Griffin, Head of Tax at Deloitte, said: “While tax changes in this year’s budget are expected to be modest, the Government has an important opportunity to signal the path ahead in terms of corporate and personal tax strategy and reform. Overall, Brexit-proofing the economy is expected to be a focus of the Budget, to the extent within our control, with significant investment and solutions needed in housing, infrastructure and education, to enhance Ireland’s competitiveness and build capacity for a growing economy.
“The international tax landscape continues to evolve at pace, and there are a range of international tax reforms that Ireland must adopt over the next few years. The consultation process to be launched on budget day, in relation to these and other corporate tax policy matters, will be an important process in the evolution of Ireland’s corporate tax regime to 2020. The Government must ensure the corporate tax strategy remains focused on rate (12.5%), reputation (playing fair but playing to win), and regime (competitive tax regime).
“The Government should look to reduce the marginal tax rate for all taxpayers in Ireland, and improve current incentives or introduce additional incentives to not only attract, but also to retain talent. While modest measures are anticipated in Budget 2018, given the fiscal space available, there is an opportunity to set out a roadmap for personal tax reform and marginal tax rate reduction over time,” continued Ms Griffin.
Deloitte highlights that infrastructure and housing issues are key challenges the Government faces in the upcoming budget. To maintain and support a growing economy and maximise future growth opportunities, these key issues must be addressed to ensure Ireland is focused on future capacity.
Ms Griffin concluded: “Budget 2018 brings opportunity for Ireland and for the Government to show confidence at a time of increased international and geo-political uncertainty. However, the opportunities are set against a backdrop for investment and solutions needed in housing, infrastructure and education. Tackling the infrastructure and housing supply should be part of the larger goal to enhance Ireland’s competitiveness and build capacity for the future - supporting inward investment, Irish business and entrepreneurship. It needs to be a country of opportunity with the necessary infrastructure to support a dynamic growing economy.”
Views and predictions included in Deloitte’s Pre-budget report include:
Ireland Inc and Foreign Direct Investment
- As the international tax landscape continues to change it is imperative that Budget 2018 seeks to ensure Ireland’s competitive tax regime is retained and that Ireland continues to be a location of choice for FDI.
- While it acknowledged that the fiscal space available is limited, it is important that Budget 2018 is used as an opportunity to provide certainty to the multinational community in relation to a low tax competitive corporate tax regime, particularly in providing a roadmap for consultation and implementation of BEPS/ATAD and other measures, where appropriate, in the next number of years. The consultation process to be launched on budget day in relation to a range of corporate tax policy matters will be an important process in the evolution of Ireland’s corporate tax framework.
- Whilst significant changes are not expected in the Budget in the area of FDI, amendments to our taxation legislation are imminent due to the deadlines for implementing the EU ATAD actions and further BEPS actions in the coming years. Budget 2018 should announce a consultation process following the publication of the Seamus Coffey report on Ireland’s Corporate Tax Code, where a range of important tax policy issues will require careful consideration.
- While the financial services industry has a list of changes that it would like to make to our tax law to make it more business friendly - such as enhancements to SARP, legislation for carried interest and deferred compensation for example - there is a reticent acceptance that the landscape has changed and the Budget each year will not contain a list of measures that the industry would like introduced - particularly in light of the limited fiscal space available for tax measures this year.
- However, with that grumbling acceptance, the quid pro quo must be “if you are not going to do something nice, then don’t do it at all”.
- While there are a small number of technical changes needed to tidy up some of the IREF and S110 rules for unintended consequences from the last year’s Finance Act, it would be important not to make any changes that could damage the perception of Ireland in the international markets where investor confidence is key.
The European agenda
- The issue of Public Country by Country Reporting is a sensitive one. The level of confidential information that would be available publicly means the recommendations go far beyond the BEPS proposals. The former finance Minister Noonan said that Ireland “could not serve two masters” in the EU or BEPS and chose adhering more closely with the latter. This is something that should continue. A similar approach should be taken for the EU mandatory disclosure regime.
- We live in a world of increased transparency and it is clear that versions of these proposals may come about, particularly the mandatory disclosure reporting.
Tax and entrepreneurship
- In order to encourage entrepreneurs to commit to their business for the longer term, the CGT position should be amended by granting such individuals higher lifetime limits and lower rates of CGT, commensurate with how long they have held their shares in the business. In addition, cash extraction and exit measures reflecting a longer holding period should be considered to further incentivise an entrepreneur to stay in the business and grow it for either an IPO or the next generation.
- There may be minor enhancements to the CGT entrepreneur relief, but they will not be sufficiently significant to bring us in line with the UK equivalent and how the issue is approached in other locations. At a time when entrepreneurs may be considering an alternative home in a post-Brexit world, the absence of a significant improvement (or a clear strategy in terms of how the CGT entrepreneur relief might evolve) would represent a missed opportunity.
- The simplification of the income tax regime is long overdue and the proposed measures to deal with same should be brought forward as soon as possible. It is positive that the Government is focusing on this important topic. Given the complexities involved, we would anticipate such reforms taking a number of years to be enacted. We would recommend that an extensive consultation process should be undertaken with relevant stakeholders to ensure a fair system emerges.
- The stresses on the rental market might be somewhat alleviated by incentivising property owners to make vacant properties available for rent. This might be aided by measures such as restoration of the full interest deduction and deductibility of LPT charges.
- We would expect some measures to be announced to incentivise property owners with regard to renting properties, and the gradual restoration of the interest deduction. Measures may be announced to review simplifying the tax system but it would be somewhat surprising if specific measures are announced and brought forward for implementation immediately.
- We would hope to see changes to CAT thresholds particularly for benefits passing between parents and children and an increase in the small gift exemption.
- There will be a need for radical solutions, some of which can be delivered through the tax system, if as a country we are to deal with the residential crisis that many saw coming three to four years ago.
- The budget for spending is small so there has to be “thinking outside the box”.
- There have been calls for a reduction in the VAT rate, similar to what was done for the hospitality industry at a minimum – however, the concern is whether this will really boost the supply side, and it would appear that Government would not be in favour of this approach. In addition, the reinstatement of full interest relief on borrowed money to buy rental property should be immediately restored rather than on the drip - currently 80% and moving north at 5% per annum. The question of a deduction against rent for property tax is a discussion point given it is akin to rates on a property and would perhaps be one of a number of changes that would help landlords stay in the rental market.
- There should be a targeted “s23“ relief in the cities to boost supply together with a capital gains tax rollover relief to allow deferral of CGT once the proceeds of sale are reinvested in further rental property.
- There could also be a loosening of rules around refurbishment of buildings for residential use and living over commercial premises to facilitate increased supply and allow a tax deduction akin to repairs for such a spend.
- One would expect that the cost of such measures would be financed by increased levels of activity in delivering housing supply, resulting in additional tax revenue. The challenges in relation to housing and rented residential accommodation will only get worse if there is insufficient action taken; if at a minimum some radical measures such as those set out above are introduced, and in addition other non-tax solutions (such as the Government funding infrastructure deficits and perhaps dealing with the cost of development levies), this might allow real progress to be made in dealing with these challenges.
- While the changes to S110 and funds regime were specifically targeted at Irish real estate assets held by such entities, the changes were unexpected in a time when providing international investors with confidence in the Irish tax regime and encouraging inward investment as a result of international changes such as Brexit and BEPS, remains of critical importance. While there may be some amendments required to tidy up the changes introduced last year and further guidance for both regimes is expected from Revenue, it is hoped that there will no further material changes to these regimes.
Global mobility, immigration and employment
- A new share scheme for SMEs will be important to drive share ownership within private companies in Ireland as it will remove some of the blockers that currently exist while also providing a tax effective way of remunerating employees.
- We do believe wider changes to the taxation of share-based remuneration should be implemented in order to offer broader incentives to all employees rather than just those employed by SMEs. Whether this is feasible as part of Budget 2018 is questionable given the level of fiscal space available, but it would be an ideal opportunity to signal potential enhancements as part of a review of the personal tax system.
- Discussion around bringing the marginal rate of tax below 50% is positive. However, there have been no new ground-breaking changes which would attract companies and their employees to Ireland. In fact, the most dramatic change has been to Revenue guidance on the taxation of mobile workers which brings those who travel to Ireland for more than 30 days in a calendar year into the Irish payroll net. This move makes Ireland far more challenging to deal with for business with cross border travellers coming in and out of Ireland. We now have a far more challenging regime in this area as compared with our EU counterparts.
- The new share scheme for SMEs will be introduced along the lines of the Enterprise Management Incentives scheme in the UK and will be positively received by private Irish companies and their employees. Unfortunately, we do not see any broader changes being made at this point to the taxation of share schemes, which will be disappointing for domestic and foreign MNCs who do not meet the SME thresholds.
- Given the current fiscal constraints, there will be no radical changes to the income tax regime. Instead we would be hopeful of minor changes that at least reduces administration for companies while having a limited cost to the exchequer. Optimistically, there may be some movement on the marginal rates of tax or at least a timeline to bring below 52%.
For Further Information Please Contact
01 498 0300
01 417 2356
At Deloitte, we make an impact that matters for our clients, our people, our profession, and in the wider society by delivering the solutions and insights they need to address their most complex business challenges.
As one of the largest global professional services and consulting networks, with over 244,400 professionals in more than 150 countries, we bring world-class capabilities and high-quality services to our clients.
In Ireland, Deloitte has nearly 3,000 people providing audit, tax, consulting, and corporate finance services to public and private clients spanning multiple industries. Our people have the leadership capabilities, experience, and insight to collaborate with clients so they can move forward with confidence.