Budget 2023 has been framed as a “cost of living” budget and, as anticipated, provided much-needed help with the rising cost of living while seeking to avoid adding to inflationary challenges. The Government has updated its forecasts for headline inflation of 8.5 per cent for 2022 and just over 7 per cent for 2023.
In response to the increase in energy and other prices, the Government amended its fiscal strategy for 2023 – doubling the size of the tax package and increasing public expenditure to protect the real value of public services. The Minister announced a package of once-off measures worth €4.1 billion to include budgetary measures for 2023 worth €6.9 billion, bringing a total budget package of €11 billion.
The focus on putting money back in the pockets of households is welcome, along with the measures to support businesses in the area of energy costs. However, we believe there were some missed opportunities, particularly in the context of supporting businesses and encouraging them to grow and expand. It is important that we do not lose sight of the need to grow and develop our indigenous businesses, given our heavy reliance on corporate tax receipts from foreign direct investment.
Some of the measures we would have liked to have seen include:
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· Employment Investment Incentive Scheme Changes to improve its attractiveness for investors as this is an important relief in the context of helping SMEs to raise capital. Changes to simplify the relief to allow for greater certainty for both companies and individuals.
· Entrepreneurs’ Relief This allows a reduced capital gains tax rate of 10 per cent on certain disposals of business assets, such as shares in a trading company. Changes to the relief would increase the level of investment in the SME sector – which both Ministers for Finance and Public Expenditure acknowledged are the backbone of the economy. There are a range of changes that could assist, including:
I. Increasing the lifetime limit in respect of this relief to €10 million;
II. Extending the relief to include passive or angel type investors – a recommendation shared by the Commission on Taxation and Welfare;
III. Removing the requirement for the investor to be involved in the business to facilitate passive investors;
IV. Extending the relief to include dividends to encourage founders to stay the course with their business and grow them to international size and scale.
Taxing the disposal of non-real estate assets used in a trade at 12.5 per cent should stimulate more investment in such assets
· Corporate tax Ireland’s corporate tax regime should be improved with respect to the disposal of assets used in a trade. Taxing the disposal of non-real estate assets used in a trade at 12.5 per cent should stimulate more investment in such assets. The more businesses acquire, invest and develop these assets, the greater the growth and profit generated in the related trades, generating more employment and further growth.
· Capital gains tax The current rate of CGT of 33 per cent coupled with the inflated value of assets could lead to a reluctance among owners of real estate to sell. Similarly, many business transactions that make sense for commercial reasons could be put on hold due to our high CGT rate and the impact of inflation driving up tax bills. We have long been an advocate for a CGT rate reduction to put Ireland on a level playing field with capital tax rates applied in other OECD countries. In addition to a reduction in the rate of CGT, indexation for CGT purposes should be reinstated to ensure that property sales and business transactions are not choked by inflation.
Landlord tax The taxation of professional landlords, ie those with 10 or more residential units, should be reformed to allow such landlords trading treatment on their active rental businesses. By removing existing disincentives, Irish investors could be provided with a stronger platform to participate in the housing market. This is particularly the case with developments where the business case to support the supply of housing by either domestic landlords or large international investors is currently challenging.
We strongly welcome the Minister’s comments that options to move Ireland towards a territorial corporation tax system are under serious consideration
Putting tax measures like these in place will help Ireland build a stronger SME sector to complement the strength of the FDI sector, and future-proof Irish tax yields in the years ahead.
From an international tax perspective, the Minister took the opportunity in his speech to re-emphasise Ireland’s commitment to international tax reform. We strongly welcome the Minister’s comments that options to move Ireland towards a territorial corporation tax system are under serious consideration. This is a very welcome development and follows the consultation opened on the matter. A territorial corporation tax system would remove unnecessary complexity from the taxation of foreign dividends and branch profits in Ireland. Many of our key competitors for FDI have such exemptions, which would improve Ireland’s attractiveness as a destination for foreign direct investment.
Ireland has been hugely successful in using tax policy as a mechanism to support growth and employment. Yet again we are confronted with challenges, many of which are outside of our control. Thus, it is imperative that the Government continue to implement successful tax policies to support entrepreneurship while ensuring Ireland stays competitive in what is likely to remain a challenging environment.
Find out what Budget 2023 means for you and your business at www.kpmg.ie