The Irish Government has made it clear that this forthcoming budget will be “cost of living budget”. With the coffers being in a better place than they have been in years, the Government is taking the opportunity to ease the inflationary burden on individuals and hopefully SME’s. With the ECB slow to increase interest rates it is left to the Government to attempt to reduce cost pressures. Given the Summer Economic Statement we do not expect to see much in the Budget 2023 relating to corporation tax rather the focus will be very much on income tax and other related measures. We expect that supports for business in Budget 2023 will be more in relation to measures to alleviate costs.
As has been mooted in previous budgets, when it comes to corporation tax receipts the Irish Government is trying to diversify and reduce its dependency on the top 10 companies that accounted for 53% of corporate tax receipts in 2021 based on Revenue figures. This is an increase from 51% the previous year. Corporate tax receipts were the third largest after income tax and VAT, with receipts accounting for 22.6% of net tax receipts (15.323 million). Therefore, the importance of corporation tax to the Exchequer cannot be overstated.
The biggest news headline regarding corporation tax over the previous year was the announcement that Ireland would enter Pillars I and II of the OECD International Tax Agreement, after agreement was reached that Ireland could retain the 12.5% headline corporation tax rate on companies with a group turnover of less than €750 million (with 15% rate applying thereafter). The Minister for Finance at the time estimated that the cost of Ireland entering the agreement would be in the region of €2 billion annually. Budgets of the last few years had concentrated on the implementation/transposition of various new tax rules, such as transfer pricing, Interest Limitation and hybrid mismatch. Unlike these previous years, where Ireland faced such obligations, Budget 2023 should not have the same requirements forced upon it to keep pace with OECD/EU laws. Even with the increase in the corporation tax rate for certain businesses and other external forces, Ireland can continue to attract business with the use of reliefs such as the R&D tax credit. It is also worth noting that Hungary is holding up the introduction of the minimum effective corporate tax rate at EU level. Whilst a number of EU jurisdictions are moving forward unilaterally, Ireland is waiting for consensus.
It has been mooted that within the forthcoming Budget 2023 there will be improvements to the R&D regime in Ireland as this is one method of ensuring Ireland remains competitive. For example, expediting the refund available under the R&D regime to one year from three years for all businesses would provide assistance to smaller businesses that are struggling with high costs at present and may require the working capital in the near term. This would be positive for businesses.
Other areas that the Government should focus on, especially for domestic SME’s, are to incentivise investment and support businesses. One option here would be to improve the EII scheme. The process for company’s hoping to avail of the scheme to attract investors can be very costly and this is mainly due to the ungainliness of the application process. Companies are unable to complete the process themselves and generally need third party advisers to assist them. This coupled with the process itself being very time consuming can divert much needed time and funds away from growing the business. This can be especially difficult for those businesses still in their infancy. Its reliefs like EII that will assist the Government in their aims of reducing dependency on a small number of large multinationals.
While there may not be any requirement for the transposition of EU/OECD related tax rules in Budget 2023 there will likely be more legislative changes required in future budgets. One matter to be voted on in the near future is the Anti-Tax Avoidance Directive 3 (ATAD III) that deals with shell companies. We had written about this matter earlier in the year and our article can be found here. The European Commission is expected to vote on the Directive later this year, so it’s a matter of watch this space at present. Many submissions were made from countries across the EU questioning the reasoning as why such legislation is even required and that it really just translates into an additional cost burden for an already put upon corporate sector. The additional reporting and compliance obligations being put on businesses by the EU is concerning. More compliance and red tape leads to additional costs and complexity for Irish businesses.
Climate change is also very topical. We would like to see further enhancements to support corporates to invest in the green agenda such as enhancing capital allowance on capital spend on energy efficient equipment and retro fitting of offices/premises as well as greater supports to invest in renewable energy e.g. solar or wind.
It’s not just individuals feeling the pinch of this inflationary environment especially when it comes to utilities. Many SME’s are struggling with the increase in costs, with only a brief respite between having to deal trading constraints due to the pandemic and soaring costs of doing business. The announcement of the increase in the minimum wage may also compound these issues. Recent discussions regarding a possible increase in PRSI could also mean an increase in Employer’s PRSI. Therefore, it would be vital that the Government consider cost alleviating measures not just for individuals but for struggling businesses as well especially if the Government wants to diversify its corporate tax receipts away from large multinationals.
To discuss Corporation Tax and your business, contact Richard McAufield, Tax Director on (01) 6440100.
RBK Budget Briefing
RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Sheraton Athlone Hotel and streaming live online on 28 September. Patrick Fannon, Tax Director, RBK will be analysing the tax measures announced in Budget 2023 and Oliver Mangan, Chief Economist AIB will look at the economic outlook. In the lead up to the Budget over the next number of weeks RBK’s Business and Tax advisors will look at potential tax measures that the Government could consider and areas of concerns that are facing our clients.