Simplifying Ireland's tax code is a good move

3 March 2024

The Irish Tax Institute held its Annual dinner just over a week ago. The great and the good of the Irish tax profession attended and they let me in too. The Minister for Finance was the keynote speaker and it was good to hear his recognition that there is more that we can do to simplify our tax code. Regular readers of this column will know my mantra that when it comes to investment, simplicity eats complexity for breakfast, and that was a theme of the Minister’s speech with his referencing the new Tax Administration Liaison Committee on simplification among other matters.

But let’s start with the galactically complex and the new-fangled effective 15% corporate tax rate. As the minister noted it was perhaps the first time that a Minister had attended this annual shindig “following a truly once-in-a-generation change to our tax system”. This rocks in at over 100 pages of law and the Minister noted that businesses and firms were “very much at the coal face” in applying these complex new rules in practice.

His assurance that there will continue to be extensive engagement with Revenue and Finance officials throughout this process is very welcome. I’ve been involved in such discussions, and I would like to thank the officials concerned for their continued assistance in this matter because to paraphrase a Marvel dictum: With great complexity comes great responsibility for us all. I’ve always said that it’s never easy to comment on law but writing it from scratch, with or without an EU directive preceding it, is a whole different ball game.

The Minister then looked to what we may see in our tax future. For example, he mentioned a participation exemption for dividends which I’ve previously written about in these pages. This would exempt certain foreign dividend income received from corporation tax in the hands of the recipient. The way our law works right now is that the Irish recipient company gets credit for the foreign taxes paid by the paying company such that more often than not, no tax is paid in Ireland by that parent. In that way tax is only paid once on the distributed profits. That sounds simple in theory but it’s not in practice. The participation exemption pushes all that number crunching aside and says just exempt the dividend. The Minister noted that this has been a long-standing request of business. Bringing it about appropriately in the autumn Finance bill is, in my view, a good move.

Minister McGrath noted that a further area identified as having potential for simplification are Ireland’s tax provisions for interest deductibility in computing taxable profits from a corporate tax perspective. The introduction of the EU’s Anti-Tax Avoidance Directive (ATAD) interest limitation rule in Finance Act 2021 added significant additional restrictions in this area. The Minister noted the timeliness of undertaking a review the interest regime as a whole and I couldn’t agree more.

As I’ve said in these pages previously “cash is the lifeblood of business”. If that cash is borrowed money then it makes sense to ensure that tax law should be the most certain part of the borrowing process. The current tax code treatment of interest is complex and different rules apply depending on what activity the loan is funding e.g. trading, rental or investment activity. For example much of the investment activity category is contained in a provision called section 247 of the 1997 Taxes Consolidation Act and I mention this because I dare to you to say that to any tax professional and watch their reaction!

That said, all of the abovementioned interest deductibility provisions are complex in their own right. When layered on top of each other, it can be difficult to navigate the rules or provide certainty in respect of them which places Ireland at a competitive disadvantage with other countries.

The Minister explained the above interest review will require a significant body of work over potentially a multi-year timeframe. The minister mentioned engagement with stakeholders so I’ve no doubt there will be no shortage of suggestions in making this complex aspect of Irish law simpler. One suggestion would be to adopt a principles based approach to deducting financing costs. For example, for an expense to be deducted in computing trading profits then, one of the tests to be met is that the expense must be incurred “wholly and exclusively” for the purposes of the trade. This is a principle-based approach which is understood in practice and so why not prioritise such a test across the various activity areas with the required ATAD law applying as appropriate.

Moving now to human taxation and on income tax the Minister noted that taxpayers were seeing the benefit of the first reduction in USC rates in 5 years. He continued that he was committed to introducing a further substantial income tax package in the autumn budget.

The Minister also explained that a comprehensive review of share-based remuneration is also now underway as he said “reflecting the growing popularity of, and participation in, such incentives”. This review is to be informed by the responses to the recently closed public consultation and will include an examination of the current administrative and legislative underpinning of Irish Share Schemes.

We responded to that consultation. For example, last year’s Tax Strategy Group’s (TSG) Budget 2024 papers noted that “A related additional recommendation of the [Commission of Taxation and Welfare] in relation to share schemes in general that the Department is also considering is to limit the blanket exemption from employer PRSI on share-based remuneration. A review of this matter will form part of a wider consultation on all share-based remuneration which is proposed to be commenced this year.”

So now we’ve had the consultation and as I’ve said before the exemption from employer’s PRSI is effective as it encourages employers to offer shares to employees. It is particularly beneficial to start-up companies / SMEs who don’t have cash resources. They need to be able to offer incentives to attract and retain staff where they can’t afford to fund higher cash remuneration. It allows David-type startups to compete with their Goliath-type competitors. So nothing to see here and no change required.

As the Minister said the overall message is that, despite all the challenges and headwinds internationally, Ireland is in good shape. The measures the Minister is looking at can put us in better shape but, as always, the devil will be in the detail! 

Please note this article first featured in the Business Post on Sunday, 3 March 2024 and was re-published kindly with their permission on our website.