In October 2013 Minister Michael Noonan presented Budget 2014. The Minister’s budget speech indicated that one of the primary aims of that Budget was to bring Ireland back to a position where it could fund itself fully through the international markets in a sustainable way, at competitive interest rates. It was focused on restoring sovereignty.
In the more recent Budget 2015 speech, the Minister opened his speech with a statement that the public finances were under control and that the Irish economy was growing at the fastest rate among developed economies. The speech indicated that investor confidence in Ireland had returned and interest rates on borrowing were down to record lows.
Fiscal targets have been exceeded and the government indicated that this was achieved with fewer tax increases and expenditure cuts than were envisaged.
All in all, Budget 2015 was presented at a time of renewed optimism and economic growth, emphasising the success of measures in previous recent budgets and, to a certain extent, it marked the end of the austerity period with the focus turning to taxation incentives.
Corporation Tax Incentives
Knowledge Based Economy
The Irish government is focused on the knowledge based economy and Budget 2015 sought to improve the tax incentives relating to the development of this sector.
Ireland’s corporation tax regime provides a tax credit of 25 per cent for qualifying research and development (R&D) expenditure. The tax credit is aimed at incentivising the creation of intellectual property (IP) and recent changes mean that more expenditure will qualify for tax relief.
Capital allowances (a tax deduction over an eight year period for capital expenditure incurred on the provision of IP) have been increased for accounting periods commencing on or after 01 January 2015.
The above two measures are expected to be supplemented by a third measure later this year, in Budget 2016. This measure will encourage the introduction of Knowledge Development Boxes and is expected to provide an effective tax rate below the normal 12.5 per cent headline rate of corporation tax for intellectual property income of companies.
Ireland has been the subject of significant negative publicity in respect of its corporation tax policy and the 12.5 per cent rate of tax applied to company trading income. The media widely reported that a corporation tax rate of two per cent was paid in Ireland by Apple and the outcome of investigations on this issue are pending. Despite some pressure internationally, the government has continuously stressed that the 12.5 per cent rate will remain.
Despite reiterating that the 12.5 per cent rate would remain, Budget 2015 provided for the end to the ‘Double Irish’ structure, which historically allowed non Irish companies to shift profits to tax havens. The cornerstone of this arrangement was the use of an Irish incorporated company which paid no Irish tax as it was tax resident in the tax haven due to it being centrally managed and controlled there. Since 01 January 2015 all new companies incorporated in Ireland are treated as being tax resident in Ireland. Existing companies will have until the end of 2020 to rearrange their affairs as the new provisions will not take effect until 01 January 2021 for existing companies.
Income Tax Incentives
When an economy is growing, reducing income tax rates can stimulate further growth by increasing disposable income and consumer spending. The marginal rate of income tax was reduced by one per cent for 2015. The lower Universal Social Charge (USC) rates were also reduced slightly and the 20 per cent lower rate band was extended by €1,000.
The marginal tax rate for the high earners has been maintained at 55 per cent (when social insurance contributions of four per cent are included) because of an increase in the highest rate of USC. Overall, the effect of recent adjustments on the net take home pay of taxpayers has been minimal.
The Special Assignee Relief Programme (SARP) provides for income tax relief on a proportion of income earned by an employee who is assigned to work in Ireland for that employer. The relief aims to facilitate multinational and indigenous companies in attracting high earning, key people to Ireland to create more jobs and to encourage the development and expansion of businesses. The relief has been extended until the end of 2017 and the conditions of the relief have been relaxed, to allow more people avail of the relief.
The Foreign Earnings Deduction (FED) was introduced in 2012 to support efforts by multinationals and indigenous firms to expand their exports into the growing economies of the ‘BRICS’ countries (Brazil, Russia, India, China and South Africa). The FED provides a deduction from income, for income tax purposes, of up to €35,000 per year. The relief has been extended until the end of 2017. The list of qualifying countries has also been extended and the conditions of the relief have been amended, allowing more people avail of the relief.
Budget 2016 - What to Expect
Estimates suggest that real GDP grew by close to five per cent in 2014 and growth of four per cent is expected in 2015, the highest growth rates in the EU in both years. We can expect that Budget 2016 will be focused on improving tax incentives and reducing taxes, to encourage employment and transactions.
The Minister has already signalled the introduction of Knowledge Development Box corporation tax incentives for intellectual property as outlined above. A consultation process is ongoing and measures are expected to be introduced in Budget 2016.
Jobs are a Government priority and the Minister recently pointed out that employment is growing in virtually all sectors across the economy and figures released recently put the number of new jobs created at 95,000 since the low-point in mid-2012. The government aims to return to full employment by 2018 and it is anticipated that reform of the personal taxation system will lead to an additional 15,000 jobs on top of what has previously been forecast. The income tax measures announced in Budget 2015 are the first stage of a multi-year plan to progressively reduce the marginal tax rate on low and middle income earners.
The current government’s ability to implement a multi-year plan will be ultimately dependent on whether they are returned to government following the next general election which is due to take place in the first half of 2016. As Budget 2016 will be the last budget of the current government, there is speculation that the budget will be focused on increasing net take home earnings for taxpayers to boost public sentiment and maximise the chances of the current government returning to power.
Brian Broderick, Tax Adviser, CTA, TEP, O Hanlon Tax Limited, Ireland