The Irish economy is growing at a healthy pace
The European Commission has forecast that the Irish economy will be one of the fastest growing EU economies in 2017 and 2018.
As Brexit negotiations continue the Irish economy is faced with a high level of uncertainty and unprecedented challenges. The ESRI along with other international analysts have predicted that as the UK is one of Ireland’s closest economic partners, the Irish economy could be particularly negatively impacted by the effects of Brexit, particularly in the context of a hard Brexit.
Upcoming Brexit negotiations are due to cover issues affecting the Republic of Ireland and Northern Ireland. The question of how much Brexit will cost the Irish economy is at the forefront of everyone’s mind. Government should be focused on Brexit proofing the economy by putting us in a position to deal with such impacts to the maximum extent possible. As it is yet to be determined what final form Brexit will take, Government should focus on issues within our control in the domestic economy - to provide resilience from the impacts of Brexit, enhance Ireland’s competitiveness and attractiveness to foreign investment and re-investment, and position Ireland to take advantage of new opportunities that exist.
All of this comes at a time when the potential for US tax reform remains uncertain. While there is general bipartisan acceptance in the US that there is a need for US tax reform, it is not yet clear what form this would take. It is not clear whether US tax reform would be as significant as indicated in the Trump proposals, how it would be funded, and whether it is really feasible in the near term for US tax reform that will really be permanent and transformational. Suggestions of a 15% US corporate tax rate have been dismissed in many quarters as unrealistic as things stand currently, and a US tax rate in the mid-20s may be a more realistic target. Clearly as one of Ireland’s main trading partners, and Ireland is a significant location for US investment, this remains a key area to be monitored in terms of potential impacts and opportunities for Ireland.
Against a backdrop of stronger economic performance, the decisions which will be made by Government in Budget 2018 and over the next few years will be critically important to ensure that we can drive Ireland into the next decade with a robust economy, despite current uncertainty in a global context.
Uncertainty can bring opportunity
Ireland has a strong track record of attracting foreign direct investment and re-investment. Brexit is likely to create a level of new investments into Ireland, particularly in the financial services and broader life sciences, FinTech sectors, but broader investment opportunities will emerge. There will remain many businesses globally that will wish to have a hub in Europe in an EU Member State with access to EU markets – Ireland can continue to attract its fair share of that investment, provided the right policies and issues are prioritised. Indeed, a level of future US investment into Europe which may otherwise have been located in the UK, may determine that Ireland or other EU locations are more appropriate and provide greater certainty and stability.
There is also opportunity for Irish business to grow and expand by exploiting European and global markets which may not have been previously considered. In this respect, Government will need to provide focused support to Irish entrepreneurs and business with growth potential to compete internationally. There are a number of measures outlined in our pre-budget perspective document which Government should consider for adoption in order to improve conditions for business and the wider entrepreneurship agenda in Ireland.
More broadly, there is an opportunity for Ireland to position itself at the heart of new business opportunities and global business developments, for example in areas such as digital transformation and the digital economy.
The Summer Economic Statement 2017 outlined fiscal space of €1.2 billion for spending and tax reductions. Of that amount, €390 million relates to tax, including €220 million available for new tax measures in 2018. Therefore, our expectations are that only modest changes will be on offer. However, Budget 2018 still provides Government with an important opportunity to signal the path ahead in terms of corporate and personal tax strategy and reform.
Ireland has made a strong commitment to continue to offer a competitive, stable, and transparent tax environment. Ireland has committed to the OECD BEPS process and is playing its full part in implementation. Indeed, in June earlier this year, Ireland, along with 67 other countries, signed the Multilateral Convention to implement tax treaty measures to prevent base erosion and profit shifting (which will move into implementation mode over the next number of years). On foot of the BEPS proposals, the EU has implemented AntiTax Avoidance Directives that go beyond the OECD’s recommendations, and these measures will also need to be adopted as part of Ireland’s tax code in the coming years.
The international tax landscape continues to evolve at pace, and we will see the impact of BEPS and ATAD measures in Ireland and internationally in the period from now to 2020 in particular. Our corporate tax strategy, focused on rate (12.5% rate), reputation (playing fair but playing to win), and regime (competitive tax regime) has been an important cornerstone of our corporate tax positioning, providing confidence and certainty to corporate taxpayers. It is important that Ireland continues to focus on our competitiveness and overall tax regime, in particular as it approaches the introduction of BEPS and ATAD measures into Irish law.
The recommendations from the recently published review of the corporate tax code undertaken by Seamus Coffey, provide an ideal platform for consultation and engagement on the evolution of the Irish corporate tax regime, on the mandatory changes which need to be introduced, to demonstrate Ireland’s steadfast commitment to the 12.5% rate, and to identifying within a strategy framework what other measures might be taken to enhance our corporate tax regime.
In the area of personal taxation, the road ahead is less clear-cut and Budget 2018 provides Government with an opportunity to set out its perspectives – not just in terms of measures that it will introduce as part of Budget 2018, but its priorities in this area in the years ahead. 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. A roadmap should be developed to determine the approach and timing to reduce the marginal tax rate, as well as ensuring that assignee reliefs are operating at competitive levels to attract key roles and talent into Ireland (which is an important factor impacting location decisions for investments).
From a broader business perspective, the new SME-focussed share-based remuneration incentive expected to be introduced in Budget 2018 would help employers attract and retain key talent. Increasing the lifetime limit on the Entrepreneur’s Relief would incentivise innovation and enterprise. The continued phasing-out of USC, or other reform mechanisms to reduce the marginal tax rate, is likely to take place over a number of budgets. In Budget 2018, we expect this might take the form of a reduction in USC rates which would provide a modest improvement to the taxation of individuals’ incomes, particularly of middle and lower-income earners.
While these improvements would certainly be welcomed, there are a range of further recommendations that should be considered from a policy perspective (and which we note within this publication) to support Ireland’s economic positioning – supporting the FDI agenda, Irish business and entrepreneurship.
Infrastructure and housing challenges must be tackled
The foregoing comments in relation to tax policy, the impact of global developments such as Brexit and potential US tax reform, and opportunities for Ireland at a time of increased uncertainty – this is all 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. However, 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.
We at Deloitte look forward with a focus on opportunity in the face of uncertainty and what measures Budget 2018 may bring on a range of important policy matters.