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Deloitte publishes its pre-budget 2023 recommendations 

Planning for future growth and resilience

Budget 2023 needs to reform, enhance and simplify the Irish tax landscape to alleviate the cost of living burden, while encouraging future investment and growth in Irish businesses.

Budget 2023 should aim to strategically position Ireland to address the key uncertainties in the global economic and tax landscape. It should focus on sustainable growth in key areas such as knowledge and innovation focussed industries and rapidly growing indigenous businesses, according to Deloitte Ireland’s pre budget 2023 recommendations document that was published today.  

While the Deloitte pre budget submission addresses a range of issues spanning personal taxes, entrepreneurship, inward investment and innovation, a number of “mega trends” can be identified in the current global tax and economic landscape including:

  • Future success and growth in the SME space: Measures such as a 20% rate of tax on certain dividends to encourage growth in businesses and retention of cash for investment would be welcome, as would  immediate changes to the Employment Investment Incentive and Start up refunds for Entrepreneurs schemes. Such changes would assist SMEs in creating sustainable growth and would be a practical indicator of support and investment in future success from the current Government.
  • Labour force pressures and personal tax regime: Reducing the 52% marginal tax rate, combined with reviewing the Universal Social Charge and PRSI to simplify both systems. Enhancing the Special Assignee Relief Programme, improving the Key Employee Engagement Programme and aligning tax credits, bands and flat rate allowances with inflation will ensure that taxpayer net pay is reflective of the rising cost of living
  • Inflationary pressures and the cost of living: Revisions to tax bands and flat rate allowances would assist taxpayers in addressing inflationary pressures. The reintroduction of bin and service charges tax relief and enhancements to the Rent a Room relief and childcare services relief, would also help to address the rising cost of accommodation and to support parents in sourcing childcare as they return to work.
  • Climate change: Further enhancements could be made to a range of tax incentives and reliefs targeted towards green energy and renewables. The reintroduction of reliefs for green investments, extension of tax relief for specific expenses incurred on renewable energy projects and the use of VAT measures would ease the cash flow burden on renewable energy developers.
  • Globalisation and foreign business investment: A wide range of simplification measures should be considered to make the Irish corporation tax system more taxpayer and investor friendly including reform of the existing (and complex) rules on interest relief (i.e. tax relief on debt funding) and an overhaul of double taxation relief. Such changes, combined with continued stakeholder engagement on imminent developments would undoubtedly assist multinational groups in making future investment decisions in the face of continued uncertainty posed by international tax reform.  

Speaking about the uncertain global tax and economic landscape, Lorraine Griffin, Head of Tax at Deloitte said, “Ireland has been a major beneficiary of globalisation, one of the important factors being our corporate tax regime and the ever-present focus on providing taxpayers and businesses with clarity and certainty. Recent developments on international tax - and in particular the yet to be agreed 15% global minimum tax rate - will to some degree level the playing field with other competitor countries. In addition, inflationary pressures have dominated the conversation in recent weeks and months with inflation of 7.8% the highest since 1984[i]. While all eyes will be on the immediate changes Budget 2023 will bring for individuals and companies, an enhanced focus must be placed on measures that will provide for sustainable growth in the medium to long term, for example, through changes which will future proof tax reliefs for  Research and Development and by “blue sky” thinking in relation to the attractiveness of long term renewable energy projects, to name but a few.”  

Budget 2023 should aim to strategically position Ireland to take full advantage of unique opportunities presented by future uncertainties, while at the same time ensuring a stable and attractive environment for investment going forward.

Ireland Inc. and Foreign Direct Investment

Significant amendments have been made in the realm of international tax in recent years including the introduction of complex new tax law requirements, , and Ireland will implement the Pillar 1 and Pillar 2 rules once agreed at OECD and EU level. We cannot ignore the reality that the 15% minimum tax could level the playing field with other countries.

Along with changes to other key factors relevant to investment decisions such as access to a highly skilled labour force, housing, cost competitiveness and sufficient infrastructure, it is no surprise that the FDI landscape has become a lot more competitive in recent years. It is vital that steps are taken as part of Budget 2023 to reaffirm Ireland’s position as an excellent location for both foreign and domestic investment in business.

  • Short-term recommendations: Certainty and clarity for taxpayers and investors is critical to Ireland’s success as a place to do business. Simplification of a number of key areas within the Irish corporate tax code, particularly tax relief for  interest expense on debt funding and the mechanism for granting double taxation relief on income should
    be instated.
  • Medium-term recommendations: The proposed introduction of the 15% minimum corporate tax rate could make it more competitive to attract inward investment. Accordingly, one of the key areas of focus for Ireland  should be a continued focus on enhancing and improving our R&D regime, primarily by allowing for R&D tax credits to be fully refundable to the taxpayer. In addition, the benefit of the Knowledge Development Box may be eroded by the proposed Pillar Two rules which may impact on investment decisions in the medium term. Amendments to the KDB including an extension of the relief beyond its targeted end date of 31 December 2022 would be welcome. 

SMEs

In overall terms, SMEs account for 99.8% of the total number of business enterprises in the private business economy; they employ 1.06 million people, accounting for 68.4% of total employment in the private business economy. Updates to existing features of the Irish tax code, as well as  the introduction of new tax measures are needed to support entrepreneurs during this time of economic growth and uncertainty.

  • Short-term recommendations: Our present SME tax system needs to be reformed to not only facilitate start–ups but also to incentivise entrepreneurs to remain and scale up their businesses. Measures such as a 20% rate of tax on certain dividends to encourage growth in businesses and retention of cash for investment would be welcome, as would the immediate changes to the Employment Investment Incentive and Start up refunds for Entrepreneurs schemes to allow for the inclusion of professional services firms. In addition, an immediate action for Budget 2023 should be to provide for a tax efficient financing arrangement to enable early stage SMEs to acquire funding.
  • Our medium-term recommendations: At present, a core challenge for SMEs is scaling business internationally. In the medium term, amendments to provide for a more competitive Capital Gains Tax environment is critical . Tapering relief to reduce the rate of CGT for entrepreneurs who stay in businesses with a view to scaling their operations would be welcome. Rollover relief for persons who exit the business earlier but ultimately reinvest a portion of the proceeds would be a welcome medium-term action from our perspective. 

Individuals and Employment Taxes

In 2022, Irish taxpayers will be paying personal tax at marginal rates of 48.5% on salaries above €36,800 and 52% on salaries above €70,044. Ireland’s marginal tax rates are currently uncompetitive in comparison to other countries both inside and outside the EU, which is hampering SMEs as well as multinationals to attract and retain talent. With the advancements in remote working, high personal taxes could result in people based in Ireland moving to other locations with a resulting loss of both income and corporate taxes.

The entry to the higher rate of marginal tax should be increased from 52%. At the very least a roadmap should be put in place to demonstrate to workers when this burden will be reduced.  We would also recommend enhancements to the Special Assignee Relief Programme to remove unnecessary administrative burdens and improvements to the Key Employee Engagement Programme to bring more companies into the regime.

  • Short-term recommendations: The marginal rate of tax should be reduced from its current level of 52% and the entry point to the higher rate of tax should be significantly increased. Currently any single person earning up to €36,800 a year pays income tax at the basic 20 per cent rate, while any yearly income above that level for single people is taxed at a rate of 40 per cent (before USC/PRSI). We recommend introducing a new middle rate of income tax of 30%, and enhancements to the Special Assignee Relief Programme as an immediate action item. Enhancements to the Foreign Earnings Deduction to allow the relief to apply to all countries with an increased annual relief cap of €100,000 would be a welcome development. Such short-term enhancements would greatly benefit our position as a key location for inward investment and as a location for highly skilled workers.
  • Medium-term recommendations: We would recommend that a review be carried out of the tax treatment of share-based remuneration with a view to enhancing and streamlining the administration for the employee. Share based remuneration is often a key selling point in attracting and retaining talent within a company. Where the existing treatment of share based remuneration is enhanced in line with our recommendations, it represents a positive medium term change and allows companies to make more competitive employment offers to new hires and to retain existing staff.

Cost of Living

We would expect to see a range of short-term measures introduced to combat the increased cost of living in Ireland; while such measures are needed, the fact remains that the high inflation experienced in Ireland and elsewhere may
continue for some time and accordingly medium-term recommendations are also required to future proof certain areas of the economy.

  • Short term recommendations: Reintroduce refuse and service charges relief which would give a tax credit of circa €80 per year, in addition to the introduction of a flexi Taxsaver ticket for hybrid workers to support employees in their return to the workplace , and the costs associated with transport to and from their place of work. The marginal rate of tax should be reduced from its current level of 52% and the entry point to the higher rate of tax should be significantly increased.
  • Medium-term recommendations: Consumer price inflation is expected to average 6.5% in 2022; we would recommend aligning tax credits, bands and flat rate allowances with inflation in the medium term to ensure that taxpayers net pay is reflective of the rising cost of living. Consideration should also be given to enhancing ‘rent a room’ relief available to taxpayers who rent a room in their home up to a yearly rental limit of €14,000 per annum; enhancements to this relief would, in the medium term, bring more rooms for rent onto the market and alleviate the significant demand experienced by renters at present. 

Climate Change

Ireland’s unique geographical position gives us an opportunity to be self-sufficient in energy terms and also creates opportunity for export of surplus energy. It creates other opportunities such as the production of renewable fuels (e.g. green hydrogen/biomethane). Creating this surplus green energy to export, or produce other renewable fuels, could prove significant in offsetting the €20 billion annual IMF estimated investment required to achieve targeted emissions reduction.

Further to that, it is important that the investment in green infrastructure and
technology is stimulated and that the associated tax rules are certain and
clear. We have identified a number of tax measures which would support the
renewable energy sector.

  • Short term recommendations: We would recommend an amendment to the rules on tax relief for pre trading expenditure, to extend such relief to expenses incurred on energy generation from the standard 3-year window to a 7-year window. Such an amendment would provide a cashflow benefit to existing energy generation projects. We would also recommend the introduction of a zero-rating scheme for VAT purposes for renewable energy projects to ease the cashflow burden on energy developers. Incentives on green spending should also be considered, either by way of super deductions or capital allowances on “green” expenditures, and would align Irish tax policy with competitor jurisdictions such as the Netherlands.  
  • Medium term recommendations: We would recommend the reintroduction of tax relief for investments made in renewable energy projects; while this measure could be introduced in Budget 2023 it would serve to develop the green energy sector in the medium-term -by making investments in such projects in their early funding stages more attractive to investors. We would also recommend the introduction of a solar energy fund tax regime to encourage medium to long term investment in solar energy and to reduce the cost barriers to entry.

Real Estate

The critical challenge in addressing the housing crisis is supply, viability and
affordability. The focus should be on increasing supply, reducing costs/prices,
and removing many of the bottlenecks that developers face such as capacity
constraints, zoning, and planning. To address these challenges, we need a level of certainty in respect of tax for larger investors so they can provide the
capital necessary in a responsible way, while smaller landlords also bring
supply to the market. Where legislative changes are made, it is imperative that
such changes happen in tandem with industry consultation to ensure certainty and promote investor confidence.  

  • Short-term recommendations: Currently, where a developer acquires a site, then 7.5% stamp duty is payable on that site. However, subject to certain conditions, where residential property is developed on the site, then a refund of 5.5% is due. This relief is due to come to an end for developments commenced post 31 December 2022. This relief should be extended beyond 31 December 2022.
  • Covid19 has accelerated the trend towards online shopping and home working. While the exact outcome is unclear, this may result in a decreased demand for retail and office space. Currently, where a developer buys commercial property and re–purposes that property for residential purposes, then a 5.5% refund may also be available. Again, this relief should continue to be available post 31 December 2022. The reintroduction of mortgage interest relief, alongside a rent tax credit would provide a measure of relief to homeowners and renters alike.
  • Medium term recommendations: The GeoDirectory residential buildings report has highlighted that there are more than 90,000 vacant dwellings across the country and that more than 22,000 residential addresses are classified as derelict. Many of these properties are suitable for restoration and occupation  tax reliefs to support and incentivise such redevelopment  would be a welcome medium-term action. It is estimated that Ireland will need an average of 33,000 new homes to be provided each year from 2021 to 2030, and many believe that such targets are unachievable due to cost, shortage of labour etc. Hence, the Government should promote the restoration of suitable derelict properties and provide people with related tax incentives to do so.   
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