The Irish economy continues to grow at a healthy pace 

The Irish economy is expected to continue to record strong growth in 2019 and into 2020. The European Commission in its 2019 Summer Economic Statement has forecasted growth in all Member States’ economies this year and next but growth will be significantly stronger in some areas (e.g. Central and Eastern Europe, Malta, and Ireland) than in others (e.g. Italy and Germany). The economic forecast released for Ireland on 10 July 2019 notes that Ireland’s domestic economy maintained its momentum in the first half of 2019, with unemployment levels falling to 5% in Q1, a level last seen in pre-recession figures.

The Commission predicts Irish GDP growth at 6.7% in 2018, declining to 4% and 3.4% in 2019 and 2020 respectively. Against the backdrop of this forecast outlined by the Commission, the Summer Economic Statement outlines a number of key risks with respect to 2019 and future performance. In particular, Ireland’s trade and investment figures remain volatile and heavily influenced by the activities of multinationals. The high share of pharmaceuticals and ICT services makes Irish exports less sensitive to changes in overall global demand. Nevertheless, the positive net export contribution to GDP growth is forecast to decrease over the forecast horizon in line with the expected weakening of external demand in key export markets.

The economic outlook remains clouded by uncertainty, particularly relating to the terms of the UK’s withdrawal from the EU and changes in the international taxation environment. In the absence of major negative external shocks, the risk of overheating could increase in the near term. The tight labour market and diminishing spare capacity point to an economy possibly operating above its potential. The use of volatile and potentially short-lived foreign-company sourced corporation tax receipts to stimulate domestic demand would also fuel overheating.

Current domestic climate

Similarly, the Irish Government’s Summer Economic Statement, released in June 2019, is reflective of both the positive economic outlook for the near term and also the key challenges likely to be faced by a no deal Brexit, a risk of overheating in the domestic economy, deterioration in international trade policy and vulnerabilities in the corporate tax revenue.
Budget 2020 will therefore likely focus on the key principles underpinning the Government’s economic strategy:

• Steady and sustainable improvements in living standards;
• Ensuring sustainable fiscal policy; and
• Budgetary strategy that protects domestic living standards irrespective of the Brexit outcome.

In line with prior recommendations, the Government should continue to enhance Ireland’s international tax strategy and look to increase Ireland’s attractiveness as a key EU location for investment post Brexit. Budget 2020 should provide for measures designed to place Ireland in a strong competitive position with regard to the attraction of key talent going forward.

The Corporate Tax Roadmap – one year on

Ireland’s Corporation Tax Roadmap was published on 5 September 2018, identifying a programme of action for the implementation of various changes to Ireland’s corporation tax regime. Following the introduction of revised Exit Tax rules and Controlled Foreign Company (“CFC”) rules in Finance Act 2018, Finance Bill 2019 will continue to make further changes to the corporate tax regime in line with our obligations under the EU Anti-Tax Avoidance Directive (“ATAD”).

Notable changes to the domestic corporate tax regime will be the inclusion of anti-hybrid rules from 1 January 2020 which aim to effectively deny tax benefits obtained in cases where there is a mismatch in the classification or treatment of an instrument or entity type between different jurisdictions. Due to the complexity of the new rules, consultation on same has been ongoing with the Department of Finance since January 2019, with the latest feedback consultation period running to 6 September 2019. Deloitte will continue to engage with the Government in the lead up to the Budget and Finance Bill 2019 to provide our input on the implementation of these new anti-hybrid rules. Further consultation is expected on reverse hybrid type arrangements, with a view to incorporation into Irish law from 1 January 2022.

Finance Bill 2019 will likely also see the introduction of revised Transfer Pricing rules into Irish law, to align our standards with the revised 2017 OECD Guidelines. Extensive consultation has been carried on by the Department with relevant stakeholders on the imminent changes to the Transfer Pricing regime in Ireland, the fruits of which we would expect to see as part of the Budget process.

2019 – A year of consultations

2019 has seen a large number of public consultations in the sphere of corporate tax changes, ATAD implementation, Transfer Pricing, incentives for Small and Medium sized businesses and the Research and Development (“R&D”) tax credit.

The consultation process on these key topics has reflected a need amongst stakeholders for Ireland to remain competitive in terms of its tax and talent strategy. Ireland is in a unique position to develop a strong corporate sector in the wake of Brexit, particularly in the funds and financial sector space. However, such strategic positioning must be necessarily supported by a competitive income tax regime and a continued investment in housing, infrastructure and education. A significant challenge identified by stakeholders as part of Ireland’s ability to compete internationally for investment has focused on the need for a coordinated, comprehensive strategy to attract and retain key talent in Ireland. Certain amendments to the treatment of share based compensation as well as schemes designed to improve the attractiveness of assignee programmes in Ireland have formed a key part of stakeholder interaction with the Government in the pre-Budget process.

Our view going forward

The uncertainty created by Brexit, coupled with imminent changes to the tax landscape, means that consultation with stakeholders has and will continue to be vital to Ireland’s continued economic success. We have already seen a number of in depth consultations held in the realm of taxation matters, and expect to see even more in the coming months and years. Budget 2020 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.