Keeping Ireland competitive is one of the business community’s main hopes for the forthcoming budget according to KPMG’s head of tax, Tom Woods, who recognises that the Government has many stakeholders vying for priority against a backdrop of the pandemic, Brexit, international tax developments and a host of other challenges.
“Irish business is reasonably optimistic about growth and opportunities,” he says, citing KPMG’s just published CEO survey.
“Business leaders’ confidence is now back at pre-pandemic levels, reflecting Ireland’s relative strengths across a range of sectors. The challenge is to protect our strong appeal to multinational investment whilst stimulating growth in domestic enterprise. There are various policy areas worth considering which could make a significant difference to our ability to chart a path through what remain uncertain times.”
One example of a tax policy refinement worth considering is in the area of innovation and research and development (R&D).
“Covid-19 has shown the value of innovation in terms of how sectors such as pharma and tech delivered product solutions in record time,” he adds. “Promoting more innovation will be important for Ireland’s future. Ireland has done well in attracting R&D – however it’s a highly competitive environment.”
Woods believes that it’s time “to broaden the scope of the regime and simplify access to it so a wider pool of businesses can benefit more from it”.
Resolving challenges
Resolving the housing challenge is a fundamental issue for society, with additional implications for business, he believes. “Our ability to sustain investment and employment is at least partly based on being able to maintain Ireland as an attractive place to work and live.”
Measures such as temporarily reducing VAT on new homes, reforming and reinstating capital gains tax (CGT) rollover relief to help free up land in urban centres, and reinstating indexation relief for CGT can all make a positive difference, he says.
Woods also makes a pitch for reforming the taxation of rental income. “In the context of professional or corporate property owners, the current system is outdated, and the taxation of professional landlords should be reformed to ensure that active rental businesses of say more than 10 residential units could be taxed as trades rather than as passive income generators. We believe that this would remove a strong disincentive for Irish investors and help to rebalance the ownership of properties between foreign institutional investors and Irish landlords.”
The pandemic has also transformed the way we work. “Technology, increased labour mobility, the growth in remote working and hybrid working models are giving mobile individuals lots of choice.”
It is increasingly important to have more employees based in Ireland to support the activities of companies based here
This has implications in other areas and Woods sees a need for Ireland to have more attractive personal tax and social welfare regimes so that we don’t make it unduly expensive for employers and employees to be based here.
“Given our location and size, tax policy needs to play a greater role in attracting and retaining workers. These workers are typically well paid and therefore contribute disproportionately more to our tax receipts due to the highly progressive nature of our income tax system and the fact that employer and employee PRSI applies to all income, rather than to a capped amount such as applies in a number of other EU countries.
“If these employees relocate outside of Ireland, we could see a more pronounced drop in tax receipts,” he adds. “It is also increasingly important to have more employees and, in particular, more senior employees based in Ireland to support the activities of companies based here. This needs to be an important area of focus.”
The significant build-up of savings over the last 18 months offers an opportunity to use tax policy to stimulate more investment in domestic businesses. “Irish owned businesses employ almost one million people and are much more geographically spread across the country than multinationals,” he notes.
“Broadening the criteria for companies to qualify for the Employment Investment Incentive Scheme (EIIS) as well as a relaxation of some of the scheme rules could bring more investment into Irish businesses at a critical time. The Special Assignee Relief Programme (SARP) regime could also be extended to SMEs to help them access a wider talent pool.
“Furthermore, lowering the CGT rate, enhancing entrepreneur relief by increasing the lifetime limit, extending the 10 per cent rate to qualifying dividends, and allowing a broader pool of investors to avail of the relief could all help inject capital into the domestic sector and encourage more business start-ups.”
Central issue
The environment has become a central issue for society and tax policy has the potential to help shift behaviours quite radically to a more sustainable, carbon neutral path for the future. Woods notes the results of a recent KPMG staff competition to generate ideas to promote more sustainable and climate friendly behaviours.
“It was reassuring and inspiring to see how motivated our colleagues are to provide solutions to this challenge,” he says.
Suggestions ranged from additional relief for energy efficient home improvements; relief for farmers that make their land available to deliver renewable energy; enhanced R&D credits for activities contributing to Ireland’s net zero carbon emissions target; tax credits for the installation of EV charging facilities; tax relief for investment in green bonds and additional pension relief for ESG investments.
October's budget offers some great opportunities to enhance our competitiveness
“We don’t have a lot of time to get this right,” he says. Woods believes supportive legislation could drive a marked shift in people’s behaviour for the better. “There is an opportunity in October’s budget to demonstrate real commitment to impactful policy initiatives.”
Finally, Woods points to a growing need to undertake a detailed review of our tax legislation.
“There has been a significant body of legislation that has recently been introduced or is about to be introduced under various EU Directives and OECD mandates. Some of this legislation overlaps in its objectives with our existing legislation and there is a need to remove any duplication so that our tax code meets all of its objectives without being overly complex. I believe this would make Ireland more attractive to businesses in future.”
Looking ahead, he believes the policy choices are challenging and that government will always be faced with competing objectives.
“The need for a productive and sustainable society is self-evident,” he says. “Policies supporting innovation, housing, domestic enterprises, mobile workers and the environment are key. Such policies will also support our continued attractiveness as a destination for foreign direct investment, the fruits of which our economy has enjoyed for many years, but perhaps never more so than over the last two.
“October’s budget offers some great opportunities to enhance our competitiveness for what’s coming next and to help promote Ireland as an attractive country for all to do business in.”