pre-budget 2018


The Irish economy is growing at a healthy pace

Pre-Budget 2019

The Irish economy is expected to record strong growth in 2018 and into 2019. According to the European Commission, the GDP growth in the Republic of Ireland in 2018 is predicted to be 5.6%, the highest growth rate forecasted in the EU and 3.5% more than that forecasted for both the Eurozone and the EU as a whole. This strong growth rate is timely; 2018 marks the 10 year anniversary of Ireland being the first country in the Eurozone to enter recession in the 2008 global economic collapse. 10 years on and Ireland’s economy is strong, unemployment levels are below 6% and 2017 saw a record year for exchequer receipts at €50.7 billion. However, the Irish economy is being tested with social and economic challenges domestically. The economy is also contending with difficult Brexit negotiations, escalating trade disputes, and a changing international tax environment expedited by US tax reform, EU tax policy changes and OECD tax developments.

As Brexit negotiations continue, the Irish economy is faced with a high level of uncertainty and unprecedented challenges. The National Competitiveness Council identifies Brexit as the single biggest, and most immediate threat to Ireland’s medium-term prosperity. With limited time remaining until the UK leaves the EU next March, negotiations have faltered and progress has been lacking, which has created uncertainty in an already unsettled and fragile environment. The lack of clarity of how the UK and Ireland will look post-Brexit impacts on strategic planning. The Government should continue to focus on Brexit proofing the economy. However, there remains opportunity for Ireland to secure investment frombusinesses seeking to relocate to an EU base or to increase operations in Ireland to strengthen their European presence.

US tax reform

The Tax Cuts and Jobs Act 2017 was signed into law on 22 December 2017 which implemented one of the biggest reforms to the US tax system in decades. This reform was introduced concurrently with sweeping changes globally. The purpose of US tax reform was to create jobs, drive economic growth in the US and make the US competitive for business and investment internationally. . While it is too early to call in terms of the future impact on investment and business flows, it is an important new factor which Ireland has to bear in mind in assessing its own competitiveness, and in ensuring that Ireland can continue to position itself to attract new investment and re-investment opportunities from US business. Companies invest in Ireland for a multitude of reasons, including access to our skilled workforce, our talent pool, our vibrancy, our gateway to Europe and our infrastructure. From 1 April 2019, Dublin will be the largest English speaking capital city in the EU, therefore we can be optimistic in the face of this uncertainty.

Current climate domestically

Ireland has recorded strong growth in recent years but challenges still remain. The Government should look optimistically to the future but with a sense of caution and prudence. This year’s Summer Economic Statement saw the creation of the Rainy Day Fund with €500 million being deposited over the next three years in addition to the initial deposit of €1.5 billion. The creation of the fund acknowledges Ireland’s overreliance on corporate tax receipts which tend to become exposed in economic downturns. Budget 2019 will be prudent providing modest changes in key areas. The Government should still continue to enhance Ireland’s international tax strategy and increase Ireland’s attractiveness as a key EU location for investment, especially in a post-Brexit era.

Finance Bill 2018 will unveil new tax measures that will be implemented into our tax law from 1 January 2019, as required by the EU Anti-Tax Avoidance Directive (ATAD). A notable new tax measure in Irish legislation will be Controlled Foreign Company (CFC) rules. Irish CFC rules will aim to attribute undistributed income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage from the CFC and tax it in Ireland (subject to conditions). These rules alone will provide challenges to companies both from a technical tax perspective and administratively. CFC rules will not be designed as a revenue generating tax measure but one that will act as a deterrent to base erosion and profit shifting. Notwithstanding the CFC rules, other rules under the ATAD will be required to be adopted by Ireland over the coming years which will require companies to assess transactions through a new lens, under new rules. On adoption of the new ATAD measures, Ireland needs to implement these rules in the context of competitiveness. Ireland should not adopt more onerous rules than the ATAD requires as to do so would make Ireland less competitive than our European Union colleagues who implement the rules contained in the ATAD as stated.

All of the above is set against a backdrop of a critical need for investment in housing, infrastructure, and education. There is a real opportunity for Ireland to position itself for the future and for future economic growth and stability. Ireland 2040 was a welcome announcement in 2018 but we need to ensure there is momentum now and appetite to accelerate the development of infrastructure. Unless the current situation in relation to housing and rented residential accommodation in particular is addressed, this will become a binding constraint on Ireland’s economy and our ability to attract investment and ensure new jobs can be created or retained here.

Tackling infrastructure and housing supply should be part of a larger goal to improve Ireland’s competitive climate to attract international talent and large scale FDI, as well as ensuring Irish business and entrepreneurs can grow and scale their business from Ireland. We need people to want to live and work in Ireland, to want to move to Ireland and add to the economic potential and opportunity for the country – we need to invest to ensure this happens in the future, that accommodation is available, as well as schools (including those of an international stature) and with the necessary infrastructure to support a dynamic growing economy.

For the individual taxpayer it is acknowledged that the marginal tax rate remains too high, and this is an important factor in the war for talent, in particular in seeking to attract individuals to work in Ireland. It would be a positive move if the standard income tax rate band was increased thereby raising the entry point to the higher rate band. It is difficult to see a change to the rate but increasing the bands will be welcomed not only domestically but this will further enhance our international competiveness in attracting business travellers to Ireland. Ideally, one would like to see the publication of a personal tax reform roadmap, setting out a strategy to reduce the tax burden on work, as well as broader reforms to the taxation of share based remuneration and assignees.

Ireland has always competed internationally for investment and should continue to do so in an increasingly competitive environment. Ireland should play fair but play to win. Ireland has considerable challenges to face over the next few years but I remain optimistic of further investment into Ireland whether that is increased FDI or companies looking for an EU base in a post-Brexit era. The environment remains uncertain, but uncertainty breathes opportunity. Ireland knows how to deliver for companies that locate here but the Government need to make sure we are in position to compete and win first.

Deloitte will continue to engage with the Government in the period leading up to Budget and Finance Bill 2018 to provide input not just on the technical assimilation of the ATAD into our rules, but also on policy matters more closely. Consultation with both industry and practice will be critical during this period and we encourage our clients to contact us should you wish to feed any perspectives into any of the consultation papers to be published in the period leading up to Finance Bill 2018.

Lorraine Griffin

Head of Tax

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