With the general election just nine days away, the political parties’ manifestos are being scrutinised in detail.
Although the election debates are primarily dominated with health and housing, the future of Ireland’s corporation tax base is an interesting side show to consider at this time.
Foreign Direct Investment
Not surprisingly, both Fianna Fáil and Fine Gael manifestos set out their commitment to Ireland’s 12.5% corporation tax rate. However, both manifestos also outline significant plans to assist Irish SMEs over the coming term, if in power.
This would appear a direct response to the concern of Ireland’s corporation tax receipts suffering a downturn in future periods. The volatility of Ireland’s corporation tax receipts will be of significant concern to the next Irish government.
The recent publishing of the 2019 exchequer figures show corporation tax collections at a record high of €10.9bn.
This was an impressive performance, almost 6% ahead of FY18 and 15% ahead of forecast for the year. The strength of the 2018 and 2019 corporation tax figures has been one of the main talking points of the last two years of exchequer results, with the concern over US tax reform not having the impact on the large multinationals based in Ireland which was initially feared.
Exchequer income from corporation tax has more than doubled in the past five years. However, there is a concern this income stream is too reliant on a small number of large firms and on foreign owned multinationals which may not remain fully committed to Ireland in a changing international tax landscape. A total of 45 – 50% of Ireland’s corporation tax intake comes from the top 10 firms and in 2018, 77% of corporation tax receipts came from foreign owned multinationals.
Whilst the risk of losing these multinational companies would be a huge dent for corporation tax, there is also the knock-on effect of strong payroll receipts arising from the large workforces these companies employ and positive VAT intake driven by confidence in consumer spending due to Ireland’s high employment rate.
Forecasts suggest that corporation tax take will remain strong in 2020 but will reduce from 2021. It is difficult to quantify the potential decrease but anywhere in the wide range from €1bn to €6bn has been flagged by various commentators. This is expected to be influenced by continuing international tax reform.
Both FF and FG have committed to working closely with the Organisation for Economic Co-operation and Development (OECD) and EU on the continued introduction of the BEPs and ATAD programmes.
However, strong leadership will be required to ensure Ireland’s corporation tax regime is not negatively impacted by a shift in corporation tax arising based on where sales actually occur through digital tax initiatives and consolidated corporation tax bases rather than where the staff and management presence is based.
These measures could see a shift to profits being recognised and taxed in countries based on levels of consumption occurring, as opposed to where the workforce driving the sales and business is based. This would have a significant impact on the level of taxable profits being left in smaller nations such as Ireland.
With this in mind, it is important the new government will defend Ireland’s position in discussions with the OECD and EU to ensure a transparent tax system that continues to uphold the long standing 12.5% corporation tax rate, and ensures fair profits are maintained in Ireland for the large workforces based here.
However, it is also encouraging to see FF and FG’s commitment to SMEs to ensure a defence against the future loss of large corporates by investing in our domestic businesses.
Support for SME’s
One item set out in both FF and FG’s manifestos for SMEs is to encourage more uptake on the research and development tax credit for these entities. This could be done by reducing the compliance burden in order to ensure the R&D credit is more accessible to smaller entities and to allow a form of pre-approval to ensure concerns over the qualification of certain expenditure could be mitigated.
There is also encouraging acknowledgement that both the Key Employment Engagement Programme (“KEEP”), which allows a more tax efficient share award to employees, and the Employment Incentive and Investment Scheme (“EIIS”), which allows tax relief for investment in SMEs, need to continue to be improved and the ease of access to such schemes encouraged. These are important incentives to ensure investment in growing Irish SME’s and encourage retention and reward of key employees.
Fianna Fáil’s manifesto has suggested future improvements for entrepreneurs with a suggestion that the entrepreneur’s relief limit could be gradually increased from €1m to €15m and capital gains tax could be reduced to 25% from the current rate of 33%.
Entrepreneur’s relief allows gains on the sale of a qualifying business to be taxed at 10% rather than the current 33% capital gains tax rate. The increasing of the life time €1m threshold has been lobbied for a number of years now, however, no increase has been announced in the previous budgets.
Interestingly, the UK equivalent relief which has a £10m limit and is often used as the benchmark for lobby groups supporting an increased Irish level, has come under some recent pressure to be reduced in the upcoming UK budget.
Whether these measures to reduce the capital gains tax paid in Ireland on a sale of a business would obtain the required support, especially in a potential coalition government, remain to be seen.
All things considered, we are entering an interesting time as we await the outcome of the election and the formation of a new government. Pressures to show improvements in health and housing will be at the forefront of media focus but it is also an important term to ensure stability for Irish based businesses and to work alongside the OECD and EU to implement their tax measures in a transparent but positive way for Ireland.
PAYE and self-employed individuals will wait in hope for a reduction in income tax and USC rates which will ultimately be reliant on a strong economy and the continued strong performance of corporation tax. The suggested supports for SMEs will be welcome to encourage growth in our domestic businesses.
Hopefully, promises made during election campaigns are not forgotten about in future budgets. We await the outcome of the vote on Saturday, February 8th and the shape of the future government, with interest.
You can find out more about Brendan Murphy, Tax Director, by visiting his LinkedIn profile.