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Deloitte response to Commission on Taxation and Welfare

The broadening of Ireland’s tax base is an important area to address in order to withstand future economic shocks.

Furthermore, increased focus is needed on enhancing and supporting the creation of a strong and innovative SME sector, while also evaluating Ireland’s position as a headquarter/holding company location, according to Deloitte’s response to the Commission on Taxation and Welfare’s consultation, Your Vision, Our Future. Deloitte has recommended a number of actions and measures to support these areas, in addition to how taxation measures can be used to support the climate agenda.

Commenting Lorraine Griffin, Head of Tax, Deloitte Ireland commented: “The public consultation process is hugely constructive. We welcome the opportunity to share our views on how Ireland’s tax and welfare systems should be structured to better position the country to respond to developments over the next few decades. Ireland’s tax system should be equitable, deliver certainty and be designed to attract and grow businesses. Importantly, as a small open economy, it should position us competitively vis a vis other countries. Critically, the system needs to be sustainable to withstand economic shocks and support long term economic growth. Broadening the tax base is an important action in this regard. The measures that we recommend in our submission will, we believe, support the tax system to achieve Ireland’s strategic goals.”

The international landscape

Ireland’s narrow tax base is an area that should be addressed. With the potential reduction in Ireland’s corporation tax base as a result of international tax reforms, broadening the tax base will be essential to ensure Ireland remains resilient against economic shocks. Further, the 15% minimum tax will, to some degree, level the playing field with other competitor countries. Ireland needs to ensure it remains a competitive location in which to invest and grow businesses both from the perspective of inward investment and also domestic, indigenous growth.  Retention of the 12.5% corporate tax rate (and a clear and transparent application of the 15% rate where relevant) will also be critical to future success in the international landscape.

Deloitte recommendations

Ireland should evaluate its role as a headquarter/holding company location for multinational companies ensuring it remains at the very least competitive as against other countries. There are a number of areas in urgent need of reform, in particular with respect to reducing the complexity of the interest deductibility rules and the double taxation relief rules. In addition, improving our current R&D tax credit offering, for example by expanding the list of qualifying scientific fields to include emerging technologies such as artificial intelligence, data analytics and carbon neutrality would be beneficial.

SMEs and the indigenous sector

Prior Budgets have focused on tax measures to attract FDI, while tax measures associated with small businesses and entrepreneurs have received less attention. While Ireland has a significant number of reliefs and incentives geared towards SMEs, many need to be refreshed and streamlined and should be revisited. In addition to continued efforts in the multinational sector, to ensure the tax base is sustainable, Ireland should focus on supporting a first class productive and innovative SME sector, capable of being scaled from Ireland, that is profitable and produces high value jobs. Ireland has, in the past, introduced new measures and amended existing measures aimed at the SME sector, but such measures have had limited take up, an example of which is the KEEP share option scheme. A strategic review of the taxation system pertaining to SMEs and entrepreneurs should be carried out to create a competitive SME tax system.

Deloitte recommendations

Currently, with the exception of the €1m Entrepreneurs relief, entrepreneurs are subject to CGT of 33% on any gains. This rate of tax is the same rate that applies to a passive investor. Entrepreneurs should be further incentivised to create employment and value and to remain and scale up their businesses over the medium and long term. Consideration could be given to reducing the CGT for entrepreneurs who stay with their respective businesses with a view to scaling up same over the medium to long term. A form of tapering relief together with relief for dividends may be an alternative option open to an entrepreneur. Deloitte has recommended that Ireland introduces a form of CGT tapered relief (in the absence of the entrepreneur relief) whereby the CGT rate reduces the longer an entrepreneur stays the course. 

The enhancement of Ireland’s R&D offering both in terms of scope and its administration would also support in terms of building a strong indigenous sector.
The current SME tax system needs to be reformed to not only facilitate start–ups, but also to incentivise entrepreneurs to remain and scale up their businesses. The taxation of entrepreneurs in a broad context should be addressed both in the context of personal taxation, taxation of funding/financing returns, as well as capital events. Ireland needs to ensure SMEs have access to capital and talent and receive the necessary support to drive research, development and innovation.

Labour taxation

An increased focus on the taxation of labour is a vital step in improving Ireland’s tax offering both for multinational companies and SMEs. Currently, the income tax system has the potential to act as a disincentive to attracting talent and inward investment, particularly when compared with the taxation of work in other countries.
Deloitte recommendations

Personal tax rates need to be reduced and the entry point to the higher marginal rate needs to be increased. The marginal rate of tax should be reduced from its current level of 52% and the entry point to the higher rate of tax should be significantly increased.
At a minimum, a roadmap should be put in place to demonstrate to workers when this burden will be reduced. Assessing base broadening measures and entry points to the personal tax system in Ireland should also be considered in an equitable way over time. Personal tax rates will become a greater differentiator for the location for investment in a post-BEPS world.

Also, Deloitte recommends a number of potential changes to current reliefs such as Special Assignee relief, the Foreign Earnings Deduction relief and increased relief and additional tax credit for remote working.

Climate actions

It is important that the investment in green infrastructure and technology is stimulated. In particular, Ireland’s geographical position is conducive to the production of renewable electricity from sources such as onshore wind, offshore wind, solar and wave/tidal. This not only gives Ireland an opportunity to be self-sufficient in energy terms but also creates opportunity for export.

Deloitte recommendations

Deloitte has identified a number of tax measures which would support the renewable energy sector including, among others:

  • The reintroduction of relief for investment in renewable energy generation
  • Extension of the participation exemption on the sale of companies that host early-stage renewable energy projects
  • Revisions to the rules on tax relief for pre-trading expenditures to bring such rules in line with the UK provisions
  • Introduction of a tax-exempt renewables fund.