Deloitte publishes its view and predictions for Budget 2017
The Government should introduce taxation and other measures in Budget 2017 to improve FDI competitiveness and to encourage native Irish businesses to grow, according to Deloitte’s pre-budget report, published today. This should be done alongside changes to address critical social issues, the report says.
The document makes a number of recommendations on how these issues should be addressed, and also makes predictions about what Deloitte think the Government might actually do on budget day.
Lorraine Griffin, Head of Tax at Deloitte, said: “We think the tax changes in this year’s budget will be modest, because the Government is expected to devote most of its fiscal firepower to the housing crisis and other important social needs. In addition, Government is likely to take a cautious approach because of continuing political and economic uncertainties.”
From a taxation perspective, Deloitte expects the Government to begin consultation on a range of new tax measures that will be needed in response to international developments such as BEPS and the EU’s new Anti-Tax Avoidance Directive. Deloitte is recommending a full strategic review of Ireland’s corporate tax regime, to ensure that Ireland is positioned to retain and attract ongoing investment from international and domestic sources.
“The strategy of ‘playing fair but playing to win’ will really need to come into its own,” according to Lorraine Griffin. “Ireland should be open to taking bolder moves, particularly given the potential corporate tax strategy that the UK may pursue in a world post Brexit. For Budget 2017, the Government will need to strongly reinforce its commitment to Ireland’s low corporate tax regime, including the three key components of Rate, Regime and Reputation identified in its corporation tax strategy.”
Deloitte believes that attracting FDI and growing indigenous business depends not only on appropriate tax policies and other business incentives, but also on solving some critical social issues.
“The shortage of housing is the most immediate one and the one the Government has really taken on as a challenge with its Rebuilding Ireland report, though urgent action is now needed to boost supply. However, other issues must also be addressed if we are to compete effectively to attract large-scale FDI, and the international talent and domestic jobs that come with it. This includes reducing the tax burden on workers, making it easier to compensate talent via shares, as well as investing in more schools offering programmes of an international stature.”
Views and predictions included in Deloitte’s Pre-budget report include:
Income Tax, Ireland Inc and Foreign Direct Investment
Deloitte view:
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As the international tax landscape continues to change it is vital that the Government seeks to ensure Ireland’s competitive tax regime is retained and that Ireland continues to be a location of choice for FDI. The Government needs to be strong and innovative in refining its offering.
Deloitte recommended measures:
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Ireland has one of the highest effective marginal tax rates internationally, with personal tax rates of over 50 per cent, and with high rates kicking in at a relatively low level. This significantly reduces Ireland’s ability to attract highly skilled and senior-level individuals. The Government should focus on reducing the marginal tax rate for all taxpayers below the 50 per cent rate and introduce additional incentives to attract talent to Ireland.
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In relation to Ireland’s R&D tax credit regime, the Government should consider making this regime more flexible by allowing a broader range of outsourcing regimes to qualify for relief. For example, relaxing the restrictions on external outsourcing and allowing an element of group outsourcing costs would increase Ireland’s competitiveness and ensure that Ireland is at least on par with other jurisdictions.
Deloitte prediction:
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We do not expect to see any significant changes in Budget 2017 in the area of FDI, but would welcome some commitment by the Government to increase its focus on Ireland’s offering as a location for FDI.
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We would expect the Government to initiate a consultation process in relation to the implementation of the EU Anti-Tax Avoidance Directive.
Tax and Entrepreneurship:
Deloitte view:
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To encourage entrepreneurs to stay with their business for the longer term, they should be allowed pay lower rates of CGT on sales of shares in their businesses which have been held for a long time.
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The SME sector needs better access to finance. The Government should therefore extend the scope of the Employment Investment Incentive Scheme (EIIS) and the Start-Up Refund for Entrepreneurs (SURE), which give tax relief to those investing in the SME sector.
Deloitte recommended measures:
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The annual cap on the level of investment for any one individual under EIIS should be increased from the current €150,000 so as to allow businesses access to adequate funding and allow investors relief on their full investment.
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That tax relief for EIIS should all be granted upfront in year one, as opposed to the current staggering of the relief.
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Introduction of a tapered CGT rate that would reflect the length of time the individual has held shares. The longer the shares are held, the lower the rate of CGT on exit.
Deloitte prediction:
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There may be minor adjustments to the CGT entrepreneur relief, but not significant enough to bring it in line with the equivalent UK offering.
Individuals – employees and self-employed
Deloitte view:
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The continued disparity in tax treatment between employees and self-employed workers must be addressed. The burden on the self-employed is much too high and is a barrier to entrepreneurship and to the development of the SME sector.
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As an incentive to employment, the overall marginal tax rate for all earned income should fall below the psychological barrier of 50 per cent.
Deloitte recommended measures:
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At present, the entry point to PRSI for the self-employed is €5,000, whereas employees do not pay PRSI until they earn over €18,000 per annum. This disparity should be amended to lessen the burden on start-up businesses.
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The current level of the earned income credit for the self-employed of €550 must be increased to the level of the PAYE credit, which is currently significantly higher at €1,650.
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The continued high rates of CAT and CGT persist in being a barrier to the transfer of assets to the next generation, as well as disincentivising people to dispose of investment assets, such as land that may be used for development purposes. Therefore, we would wish to see an immediate reduction in the rates of CAT and CGT.
Deloitte prediction:
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We expect modest changes to the position of self-employed individuals (possibly an increase in the earned income credit). However, we anticipate the high marginal rate of tax for the self-employed earning over €100,000 will continue into 2017.
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We also expect the CAT thresholds to be increased, although perhaps not to the pre-April 2009 levels.
Real Estate
Deloitte view:
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It’s anticipated and likely that we will see some tax changes, particularly around the tax treatment of the residential property sector. A growing population with solid economic activity requires adequate infrastructure to support the growth of the country in the years ahead.
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It’s also important for market stability and to ensure a well-functioning market that the private residential landlord isn’t discriminated against, so it’s likely we will see some change in this space.
Deloitte recommended measures:
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Reduction in the VAT rate on new homes to nine percent to support new entrants into the market.
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Reinstate Mortgage Interest Relief at a reasonable level. This should be reviewed when the supply of housing is normalised so that we can more appropriately house our population, including those in need of social housing, first-time buyers and those returning to Ireland as our economy grows.
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Reintroduce full interest relief for landlords of residential properties to encourage investment in the rental market to boost supply which will result in a stabilisation of rent over time.
Deloitte prediction:
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We will likely see a VAT rate reduction on residential housing, coupled with some other supports both for the first-time buyer and the landlord community. There may be some changes for funds investors, but they will need to be well thought out and grandfathered in terms of effect so that no instability is created in the short term.
Global Mobility and Employment Taxes
Deloitte view:
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Share-based remuneration has a significant role to play in attracting and retaining key talent in companies based in Ireland, be they start-ups, established SMEs or MNCs.
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In relation to attracting senior executives to Ireland, senior and middle management are in different situations. Ireland does not compare as favourably for middle-income earners due to the low entry point into our higher rate of tax. For high earners, the Special Assignment Relief Programme (“SARP”), which exempts a portion of income above €75,000 from income tax, along with the remittance basis of taxation provides a limited basis for a reduced effective tax rate. However, we still compare unfavourably to our competitors with regard to tax.
Deloitte recommended measures:
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We would suggest that the Government consider implementing lower rates of personal tax and capital gains tax on share-based remuneration and the subsequent disposal of such shares.
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The extension of SARP to allow the relief apply for USC and PRSI purposes would be a positive step towards improving Ireland’s competitiveness. More radically if the relief were extended to new hires this would help Irish based companies attract suitably qualified candidates to Ireland.
Deloitte prediction:
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We predict that there will be positive changes with respect to share-based remuneration, to potentially introduce enhancements to the Entrepreneur Relief or an introduction of a new type of share scheme akin to the Enterprise Management Incentives scheme in the UK.
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On the flip side, we expect that there will be changes to current intermediary arrangements such that those using corporate entities to provide quasi-employment services will be adversely affected and potentially brought within the PAYE net.
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We do not foresee the radical positive changes to such schemes as Special Assignment Relief Programme necessary to allow Ireland to take the best advantage of the opportunities posed by Brexit.
Article Published: 04/10/2016