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Ireland Inc. and Foreign Direct Investment

Budget 2021

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Key measures

Minister Paschal Donohue noted that the generation of just under €7.5bn in corporate tax receipts over the course of the year has reinforced the benefit to the wider economy of our long standing commitment to a stable and transparent corporate tax regime and he took the opportunity to again reaffirm Ireland’s commitment to the 12.5% tax rate.

Regarding corporation tax reform, the Minister announced that he will publish an update to Ireland’s Corporation Tax Roadmap, which the Department of Finance initially published in September 2018. This update will reflect the significant actions taken by the Irish Government to date on tax reform and the further areas for consideration, consultation and action and will also consider the reports published by the OECD inclusive framework this week and its work to address the tax challenges of digitalization. The Minister noted that further work is needed at international level and he expects that this work will reach a crucial stage next year where decisions will be needed and the future direction of the global and European corporate tax landscape will be decided upon.

In recent years, Ireland has taken significant concrete actions to ensure the Irish corporation tax code is in line with agreed international standards and has transposed a number of measures from the EU Anti-Tax Avoidance Directive (ATAD) into domestic law. However, one such measure which has yet to be transposed is an interest limitation rule which would reduce the tax deduction for certain borrowing costs to 30% of EBITDA, subject to certain group exemptions and de minimis levels. In line with recommendations made in the Tax Strategy Group papers and in light of the likely complexity associated with the interest restriction rules under ATAD, the Minister announced that it will introduce such rules in Budget 2022.

A further corporate tax measure announced by the Minister relates to Ireland’s IP regime. The Minister advised that to ensure that Ireland’s IP regime is fully consistent with international best tax practice, an amendment will be made to the legislation to provide that all intangible assets acquired will be fully within the scope of the balancing charge rules and that a financial resolution will be passed to allow the change to take immediate effect. Under current legislation, where a company disposes of, or ceases to use a qualifying intangible asset in the trade, more than 5 years after the beginning of the accounting period in which the asset was first provided for the trade, a balancing charge will not arise. The Minister noted that whilst this change is not expected to generate significant additional tax revenue, it will ensure that Irelands IP tax regime is competitive, legitimate and sustainable.

Other corporate tax measures relevant for multinationals announced today include a technical amendment to our ATAD compliant exit tax rules to clarify the operation of interest on instalment payments and the introduction of anti-reverse hybrid rules in Budget 2022 and the extention of our Knowledge Development Box for a further two years to the end of December 2022.

Our view

Ireland’s corporation tax regime is a core part of our economic policy mix and is a long-standing anchor of our offering on foreign direct investment (FDI). We therefore welcome the ministers ongoing commitment to the 12.5% corporate tax rate. This commitment provides certainty, consistency and transparency for taxpayers at a time when the Irish corporate tax landscape is undergoing rapid change as a result of international tax developments at EU and OECD level.

The introduction of an interest restriction for certain borrowing costs as required by the EU ATAD has the potential to impact a significant number of businesses (i.e. all taxpayers with borrowings) and may make the after tax cost of borrowing more expensive. The Covid-19 crisis has also resulted in significantly lower or even negative EBITDAs and increased borrowings, whose combined effect may have the potential to impose a significantly greater restriction than originally intended. We therefore welcome the Minister’s decision to postpone the introduction of the interest restriction rules until Budget 2022. This timeline should in our view be helpful in ensuring a comprehensive consultation process with legislators and stakeholders on a complex issue.

In relation to the amendments to Irelands IP regime, the Minister confirmed that the removal of the 5 year provision will only apply with respect to future acquisitions of intangible assets. Whilst this gives certainty to taxpayers with respect to existing intangible assets and puts intangible assets on an equal footing with plant and machinery assets, the ability to dispose/cease to use the intangible asset after a 5 year period and incur no balancing charge was an attractive feature of Irelands IP regime and as such, the removal of same may have some level of impact on future IP investment into Ireland.

Overall, we welcome the Minister’s ongoing commitment to the 12.5% corporate tax rate which should give multi-nationals continued confidence in our 12.5% rate. It is clear that international tax developments at EU and OECD level continue to dominate the corporate tax agenda. Businesses are also facing unprecedented challenges as a result of the Covid-19 pandemic, whilst also preparing for the end of the Brexit transition period on 31 December 2020. It is crucial therefore that Ireland remains committed to sustaining an attractive, stable and transparent corporate tax regime and having open engagement with stakeholders, in order to guard our tax base appropriately and continue to encourage new investment into the State.

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