budget 2022 Ireland Inc. and Foreign Direct Investment

Perspectives

Ireland Inc. and Foreign Direct Investment

Budget 2022

Key measures

Given the announcement last week that Ireland would sign up to the OECD global tax reform agreement and as a result of that the rate of corporation tax for companies that are part of groups with revenues of €750m and above will increase to 15%, it is no surprise that the Minister discussed this in his Budget speech. The Minister mentioned that the 15% effective rate will apply to those companies when the OECD agreement is in effect (which will be 2023 at the earliest) but reaffirmed the commitment to the 12.5% rate for businesses with global revenue below €750m. This rate will continue to apply to an estimated 160,000 Irish businesses employing an estimated 1.8 million people.

The Minister reiterated that Ireland signing up to the OECD agreement is in the best interests of the country, ensuring that Ireland demonstrates its commitment to international tax reform, while remaining competitive, and indeed strengthening the country’s global position. Importantly it also offers certainty for companies into the future.

The relief from tax for certain start-up companies will be extended to the end of 2026. It was acknowledged that the scheme continues to support investment and employment and is a valuable relief for recently established companies facing significant challenges to set up business in the wake of the Covid-19 pandemic. The scheme was also extended from the current three years to five years.

Following the announcement in Budget 2021, the Minister announced the introduction of a tax credit for digital gaming sector to encourage investment given the exponential growth in the sector not matched by employment growth. The relief will take the form of a refundable corporation tax credit for expenditure incurred on the design, production and testing of game. The relief will be available at a rate of 32% on up to €25m per project and is subject to commencement orders. Further detail will be included in Finance Bill 2021.

A number of measures in relation to the accelerated capital allowance (ACA) regime for energy efficient equipment were announced. In accordance with wider government policy to reduce reliance on fossil fuels, it was announced that equipment directly operated by fossil fuels will no longer qualify for the ACA regime. An extension to the ACA scheme was also announced for gas vehicles and refueling equipment for three years. Given the higher carbon savings offered by renewable hydrogen, the scheme was widened to include hydrogen powered vehicles and refueling equipment.

Finally, the Minister announced that Finance Bill 2021 will complete Ireland’s transposition of the EU’s Anti-Tax Avoidance Directive providing for the introduction of the interest limitation ratio and the new anti-reverse hybrid rules.

Who will be affected?

A wide number of companies will be positively impact by the measures introduced as part of the Budget 2022 – from small start-ups who will benefit from a relief from corporation tax for a longer and extended period, to companies in the Telecommunications, Media and Technology space who will benefit from the gaming tax credit. 1,500 Irish companies which are part of large multinational groups will also be affected by the increased tax rate when it takes effect.

It is surprising to note that the additional budget papers show no additional revenue is expected in 2022 from the introduction of the anti-reverse hybrid rules and interest limitation ratio, the latter in particular may have a significant impact on the amount of interest relief available to companies.

When? What to do now?

There is an element of “watch this space” particularly around the change of rate and international tax reform measures. Progress in relation to tax changes in the US continues. Certain aspects of the OECD tax reform are anticipated to take effect as early as 2023 and to meet this ambitious deadline, critical technical discussions will need to continue over the coming months in line with the framework of the political agreement. There will undoubtedly be many transitional arrangements in the interim which will have an impact on the affected business.

More detail on some of the measures announced as part of the Budget, e.g. the final transposition of the ATAD will be available as part of the Finance Bill. If you have not already modelled the potential impact of the interest limitation ratio, we recommend that work on this commences post Finance Bill.

A significant incentive introduced – the tax credit for the digital gaming sector – is subject to commencement order given that European State Aid approval is required so it will be important to monitor developments in that area. We will also be interested in seeing the finer detail on how the scheme will operate once Finance Bill 2021 is published.

Our view

Budget 2022 comes at a pivotal time in Ireland’s tax landscape, given the increase in the corporate tax rate (for some companies) to 15% once the OECD agreement takes effect. While the 12.5% has been a long-standing pillar of Ireland’s corporate tax regime, the 15% was an expected development and shows Ireland’s commitment to international tax reform. We welcome the retention of the 12.5% rate and the certainty that this brings to a significant number of Irish businesses. Indeed, we also welcome the certainty that the introduction of the 15% brings and that it is a defined rate following the Irish Government’s success for the removal of the phrase “at least”. These rates, including the 15% which is lower than many of our key competitors, together with a range of tax and non-tax factors including talent (as the Minister termed Ireland’s “attractive and dynamic workforce”), track record and infrastructure means that Ireland will continue to be regarded as an attractive location for Foreign Direct Investment. Indeed, the Budget contains many measures for the improvement of these non-tax FDI competitive factors including housing, education, infrastructure.

We welcome the extension – both from three to five year and out to 2026 – of the relief from tax for certain start-up companies. At a critical time, as we begin to navigate out of the pandemic, the certainty afforded to these start-up companies should ensure that domestic business and employment opportunities created on foot of this continue to thrive.

Ireland has a well-established film and animation sector and is poised to become a key player in digital and creative arts. The introduction of a credit to stimulate investment in the digital gaming sector is extremely welcome and will be instrumental in stimulating the digital arts sector in Ireland, which has so much potential. We look forward to seeing more detail on this, and of course other measures announced, as part of the Finance Bill.

The Minister further announced that a public consultation will be launched in the coming weeks on the introduction of an independent commission on taxation and welfare which will be a key process to assist in securing Ireland’s future and promote increased prosperity and we look forward to participating in same.

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