The cautiously optimistic Budget 2022 was announced by the Minister for Finance in October. Maud Clear, Tax Manager at Chartered Accountants Ireland, outlines what you should know.
Budget 2022 marked the first budget in almost a quarter of a century where Ireland’s commitment to its coveted 12.5% corporation tax rate could not be stated, but only for those with global consolidated revenues exceeding €750 million. The uncertainty within the Irish corporation tax base brought about by international tax reform has drawn greater focus to the growth of domestic business.
The Minister for Finance framed his Budget Day speech in a tone of cautious optimism, noting the need to “always prepare for the worst, while striving for the best”. This followed substantial improvements to the country’s estimated deficit for 2021 and 2022 in the days before 12 October, and the reality of rising inflationary pressures and a national debt of €50,000 for every person in the country.
The Minister announced the indexing of income tax bands, and a number of tax credit increases in an effort to address the increased living costs. This is a welcome measure not only for employees, but also employers seeking to attract and retain talented employees. Further welcome developments for employers include the extension of the Employment Wage Subsidy Scheme until April 2022, with certainty being provided over the subsidy rate payable and when the reduced rate of employer’s PRSI will change. On that topic, a general point of discussion was the potential for increases in employer’s PRSI to be forthcoming in the Budget in light of a significant deficit in the social insurance fund. The Government’s cost benefit analysis has obviously recognised the CCAB-I’s assertions that employer’s PRSI increase are prohibitive to job creation and no changes were announced in this area.
Budget 2022 also provides increased relief for 30% of electricity, heating and broadband costs incurred while working from home. The success of this measure will be determined by how accessible taxpayers find the claims process.
Described as the “backbone of our domestic economy”, entrepreneurs and the wider business community were accredited with creating and supporting employment. In an effort to support SMEs, the Government announced the extension and improvement of the Employment Investment Incentive (EII) scheme to entice investment in a company’s start-up years. The EII scheme is a well-intentioned relief, with employment creation at its focus; however, the impact of EU law has seen the number of qualifying companies falling to just 37 in 2018. The corporation tax relief for certain start-up companies under section 486C TCA 1997 will now be available for up to five years, instead of the current three years. The current estimated average cost of this relief per job supported is €384, so there is value in expanding the relief relative to the cost of providing unemployment supports.
A tax credit for the digital gaming sector was also announced in an effort to create employment, as Irish growth in this area lags behind global trends. A corporation tax credit at a rate of 32% will be available on eligible expenditure of up to €25 million on the design, production and testing of each digital gaming project. This credit is being introduced subject to a commencement order, as European State aid approval is required.
The policy aims of each of these announcements is quite clear. It remains to be seen whether administrative complexities prove to be a barrier to access.
Greening the tax system
There were a number of measures announced by the Government in the drive to further decarbonise the economy and meet Ireland’s commitment to reduce carbon emissions by 7% next year. These included a €7.50 increase in the rate of carbon tax per tonne of CO2, amendments to accelerated capital allowances schemes, as well as an extension of the BIK exemption on electric vehicles until 2025, albeit for reduced values.
While the direction of these policy measures is seen as positive, there is a general feeling of missed opportunity among a business community with sustainability at the top of its agenda. Ireland’s enterprise sector accounts for over 13% of the economy’s total emissions, and Budget 2022 does very little to incentivise those businesses in helping to achieve annual emissions reductions the Government has committed to over the next decade.
Green tax policy must do more to mobilise business in making a meaningful dent in carbon emissions.
International tax reform
Budget 2022 confirmed the well-signalled introduction of new interest limitation rules and amendments to the anti-hybrid rules in line with the EU anti-tax avoidance Directive. The legislation for both has been set out in the Finance Bill, following a series of public consultations and stakeholder input. The interest limitation rule will restrict a company’s net borrowing costs, but Budget documents indicate that these rules will not be revenue raising. A de minimis threshold will apply where net interest deductions are below €3 million.
The introduction of the new 15% minimum effective tax rate was discussed by the Minister in his Budget Day speech. He notes that this rate will still be less than many of our key competitors but gives little consideration to the impact of the allocation of profits to market jurisdictions. The Parliamentary Budget Office has raised concerns over the projected €2 billion impact of these measures, describing it as “a very uncertain estimate”.
The pace at which international tax reform is taking place suggests that Budget 2023 could include details on the design of the OECD’s two pillar plan in Irish tax law.