Global Mobility, Immigration & Employment
In one of the key measures, the new Key Employee Engagement Programme (KEEP) for SMEs was unveiled. The KEEP will be a share scheme similar to the Enterprise Management Incentive scheme in the UK and will be positively received by private Irish companies and their employees. This will defer the tax on exercise of share options until the point of sale, at which point Capital Gains Tax will apply. This will remove some of the blockers that currently exist - such as an illiquid market for sale and valuation requirements for example - while also providing a tax effective way of remunerating employees.
The Minister also made some small changes in the context of income tax. A primary measure was the reduction of the lower USC rates of 2.5% to 2% and 5% to 4.75%. He also announced an increase in the band ceiling for the 2% rate by €600 to €19,372. The standard rate tax band is increasing by €750 to €34,550 for single individuals and to €43,550 for married one earner couples. Unfortunately the higher rate of 8% is unchanged which means the marginal rate of tax remains at 52%.
The potential merger of USC and PRSI has been well flagged. The Minister announced the establishment of a working group to plan, over the next year, the process of amalgamating USC and PRSI over the medium term. He stated that a key objective is that this process does not narrow the tax base but ensures that the personal tax system is both competitive and resilient in the future.
Other measures include an increase in the National Training Fund levy from 0.7% to 0.8% from 1 January 2018. This is in effect an increase in employer’s PRSI from the current rate of 10.75% to 10.85%. Further increases of 0.1% in 2019 and 2020 respectively subject to the implementation of the reforms stemming from the independent review of the NTF announced in July 2017.
In keeping with the stated policy of moving Ireland to electric vehicles the Minister announced that a 0% benefit-in-kind rate is being introduced for electric vehicles for 1 year. This is intended to allow for a review of benefit-in-kind on vehicles with a view to informing decisions for the next budget. In addition electricity used in the workplace for charging vehicles will also be exempt from benefit-in-kind. This will be welcomed by employees and employers.
An item not referenced in the Minister’s speech is the application of a range of compliance interventions in preparation for PAYE Modernisation. He has set out that resources will include enhanced ICT capacity for data matching and analytics. These interventions are expected to yield €50M in 2018. Employers will need to ensure that they are happy with the current operation of payroll so as to be prepared for any such intervention.
The new KEEP share scheme for SMEs is a welcome announcement in the area of reward and talent retention. The Minister has not taken the opportunity to announce any broader changes to the taxation of share schemes, which will be disappointing for domestic and foreign MNCs who do not meet the SME thresholds. However, it would be hoped that there would be a continued focus by the Government on the area of reward in 2018, particularly given the working group on merging the USC and PRSI.
The changes to USC and income tax will be positively received. However, at 52%, we still have one of the highest marginal rates in the OECD. There were no references to changes to the Foreign earnings Deduction or the Special Assignee Relief Programme but administrative changes may potentially be introduced in the Finance Bill. Given that, in the Brexit context, most companies have chosen to increase their presence in a number of locations, now is the time to ensure we are competitive in attracting the bulk of the talent to Ireland, and capitalise on this important opportunity from a jobs creation perspective.
It is not surprising that the merger of USC and PRSI has not been implemented in this budget. This is a tricky measure to introduce with a number of challenges including the current variance in the application of these charges, the exemption from PRSI for those age 66 or over and a cumulative approach for USC as compared to a week one basis for PRSI. From an inbound mobility perspective a single social insurance charge, being social security, would likely see a reduction in the marginal rate applying to inbound assignees who remain subject to their home county social security. This may help in the attraction of inward investment.
The increase in expected yield from compliance interventions will potentially create additional administrative costs for companies. While it is important that companies pay their taxes, it would be hoped that any increased interventions will be accompanied by greater guidance on how to deal with areas open to interpretation.