Deloitte response to the public consultation of the Commission on Taxation and Welfare

On 20 October 2021 the Commission on Taxation and Welfare  launched its public consultation - Your Vision, Our Future . This consultation was an opportunity for all to have their say on the future of Ireland’s tax and welfare system, as well as  topics such as fiscal stability, employment, climate, housing, supporting economic activity and tax administration, by highlighting the existing issues and proposing reforms or improvements to both systems or their respective parts. Submissions closed on 17 January 2022. Deloitte made its submission, focusing primarily on taxation matters, including key areas such as: inward investments, the SME sector, the residential property market and climate change.

Background

The Commission on Taxation and Welfare is an independent body tasked by Government to “review how best the taxation and welfare system can support economic activity and income redistribution, whilst promoting increased employment and prosperity in a resilient, inclusive and sustainable way and ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term.”

The Commission conducted a public consultation and a stakeholder engagement exercise to elicit broad perspectives about the way in which Ireland’s tax and welfare systems should be structured to better position the country to respond to developments over the next few decades and address any perceived shortcomings in the systems as they operate today.

It contained specific questions addressing various tax and welfare issues and seeks proposals for reform and improvement from the stakeholders to both systems or their respective parts.

Key focus areas and proposals for change

The International landscape Ireland needs to ensure that its tax system remains competitive and business friendly. Ireland’s narrow tax base is a significant risk to meeting the State’s commitments. This is of particular concern at the moment as the Department of Finance has estimated that international corporation tax reforms could reduce Ireland’s corporation tax base by up to €2 billion.  Broadening the tax base will be essential to ensure Ireland remains resilient against economic shocks. 

We cannot ignore the reality that the 15% minimum tax will to some degree level the playing field with other competitor countries. We need to ensure that Ireland 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.

Ireland should evaluate its role as a headquarter/holding company location for multinational entities (MNE) ensuring that it remains at least as competitive as against other countries. There are a number of areas in urgent need of reform, in particular with respect to Ireland’s interest deductibility rules, double taxation relief and improving our current R&D tax credit offering.

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 and entrepreneurs, many need to be refreshed and streamlined and should be revisited.

In addition to our continued efforts in the MNE sector, to ensure Ireland’s tax base is sustainable, we should build a first class productive and innovative SME sector that is profitable, capable of scaling the business from Ireland, 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 should be carried out to create a competitive SME tax system.

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 incentivised to create employment and value and to remain and scale up their businesses. Consideration could be given to a reduced CGT rate for entrepreneurs who stay
with, and scale up their businesses, over the medium to longer term.  A form of tapering relief together with relief for dividends may be an alternative option open to an entrepreneur. We have 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. 

We should also improve our R&D offering, both in terms of scope and its administration – this may be a critical component of Ireland’s corporate tax offering in future decades, and it is critical that the tax relief evolves in tandem with the digital economy, industry 4.0, and the broader R&D and innovation context in which businesses operate today and in the future.   

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. We need to ensure that our SMEs have access to capital and talent and that such SMEs receive the necessary support to drive research, development and innovation.

Labour taxation

An increased focus on the taxation of labour is, in our view, a vital step in improving Ireland’s tax offering both for MNEs and SMEs. Currently, our income tax system is a major disincentive to attracting talent and inward investment. 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 the very least, 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. It should also be noted that personal tax rates will become a greater differentiator for the location for investment in a post BEPS world and future plans for a minimum corporate tax rate for large enterprises. With respect to proposed reforms to promote and maintain employment, our response notes a number of potential changes to current relief such as Special Assignee Relief Programme, the Foreign Earnings Deduction and increased relief for remote working.

Climate actions

It is important that the investment in green infrastructure and technology is stimulated and also that the associated tax rules are certain and clear. We have identified a number of tax measures which would support the renewable energy sector including:

• The potential reintroduction of relief for investment in renewable energy generation;
• Extension of the Capital Gains Tax 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;
• Providing for a zero rate of VAT to be applied to renewable energy projects until such time as the project is operational, to ease the cash flow burden on renewable energy developers;
• Introduction of a solar energy fund tax regime to encourage investment in solar energy and to reduce the cost barriers to entry. This would also help Ireland achieve committed carbon reduction targets and could position Ireland as a European leader in this area; and
• Enhanced tax exemption and reliefs for companies and individuals in respect of certain gains and investments (e.g. EIIS), accelerated capital allowances for energy efficient equipment.

Housing and Infrastructure

Our responses to general housing related questions outlined a number of recommendations including an extension of various Stamp Duty reliefs (e.g. development of residential property on the site and re-purposing the property for residential purposes); a reintroduction of Mortgage Interest Relief and an expansion of the Help to Buy scheme to second-hand homes and second-time buyers in certain circumstances.

Next steps

Following the public consultation, the Commission proposes to engage with stakeholders including representatives from community, voluntary and environmental groups as well as business, unions, research institutes and the academic community through the proposed Dialogue on the Future of Tax and Welfare in Ireland. This event is expected to take place in early 2022 and stakeholders will be notified of the opportunity to participate in a timely fashion.