They came, they saw and they reported on July 7th. The International Monetary Fund’s (IMF) report was welcomed by Ministers Donohoe and McGrath with the accompanying press release noting that the Fund acknowledges that the Irish economy has rebounded strongly from the pandemic, but notes mounting headwinds, including spill-overs from the war in Ukraine.

Minister Donohoe highlighted the Fund’s view that the stance of budgetary policy for this year is broadly appropriate. Minister McGrath referenced the IMF’s highlighting of the scope for high-quality spending to facilitate the transformation of the economy while safeguarding fiscal sustainability. Budget 2023 is only around the corner now.

On page 2 of the 66 page report the IMF explains that “Noting the long-term demographic trends and remaining uncertainty regarding corporate income tax revenues, Directors saw merit in efforts to bolster pension sustainability and further broaden the tax base”. The issue of corporate tax revenues is well known and was put succinctly in the recent Summer Economic Statement when it referred to “the resilience of corporation tax receipts, which amounted to €15.3 billion last year (a decade ago, receipts from this source amounted to just €3.5 billion). That said, these receipts now account for nearly €1 in every €4 collected; moreover, around half of these receipts are sourced from just ten large firms. To put it another way, this means that €1 in every €8 collected by the State comes from an exceptionally small number of firms, a concentration risk which represents a clear vulnerability for the public finances”.

However, the broadening of the tax base has been a consistent theme with the IMF for a while now, noting in their 2021 report that “After the recovery is complete, the tax base should be broadened to help finance productivity-enhancing investment in human and physical capital, and to resume the reduction in public debt…”. On that point the IMF’s 2022 report notes that recent reform to the property tax system aims at modernising it and broadening its base. It explained that properties will now undergo updated valuations every four years, and houses not previously included in the taxation system will now be covered. It noted that the Commission on Taxation and Welfare will shortly report on their recommendations on tax and spending reform options. I’ll come back to this ”base broadening” issue in a moment.

The IMF’s 2021 report also noted that Ireland continues to have active engagement in implementing the international tax reform agenda. In the 2022 report the IMF explained that the Government is very supportive of the Two Pillared Solution proposed by the OECD and have recently opened a public consultation on the domestic transposition of the EU Minimum Tax Directive (longhand for the 15% corporate rate). That consultation closed on Friday 22nd so there is much still to do in this evolving area. However, in the past the Department of Finance has sought stakeholder input in connection with significant tax measures and continued involvement is welcome given that the successful application of tax law implementation abhors a vacuum of silence between tax implementors and taxpayers. It’s good to talk.

The Fund recognised that the government is actively engaging in the international dialogue on Corporate Income Tax reforms noting that it issued an update to Ireland’s corporation tax roadmap, charting progress and committing to additional measures and have also fully transposed the Anti-Tax Avoidance Directives.

However, the fund recognised that the fiscal outlook should be monitored closely given future changes in international corporate tax. It explained that with corporate tax being the third-largest source of tax revenue (20 percent of tax revenues), the authorities estimate a revenue loss of at least 0.5 percent of GDP annually. While it is still early for the effect of the changes to be determined, the Fund noted that “it is promising that thus far MNEs continue to invest in Ireland attracted by the country’s non-tax comparative advantages, including its common law, stable policies, strong links with the EU, US, and the UK, and highly skilled labour force. Given the uncertainty and the volatile nature of CIT revenues, they should be treated with caution, allocating any windfalls to either the Rainy-Day Fund or to reduce debt”.

But back to broadening the tax base. The Fund highlighted that with a low revenue-to-GDP ratio compared to other advanced economies, there is scope to increase less distortive taxes. It said the “structure of the VAT rate can be simplified, and items subject to preferential VAT or excise rates can be reduced. Recent improvements in the property tax framework are welcome. Further efforts should aim to gradually increase the property tax rate from its very low level while ensuring adequate social protection”. They also highlighted that there is also “scope to improve the personal income tax (PIT) system and reduce administrative costs. As previously recommended by staff, an introduction of additional tax bands and rates to the PIT and appropriately calibrating their tax rates would allow preserving the progressiveness of the system, while broadening the tax base, and reducing disincentives to work more… Furthermore, recalibrating the income tax system by absorbing the Universal Social Charge (USC) could help reduce administrative costs”.

You can see some of their points but care is required here. For example, on the VAT side, exempt and zero-rated supplies would include such items as most food and drink for human consumption, certain educational services, certain theatrical and musical performances. Tinkering with these may cause other issues.

As I’ve previously said many times in these pages that when it comes to investment, simplicity eats complexity for progress. Making the tax system simpler and fairer benefits all especially when you consider the number of rates of USC and income taxes. The IMF’s reference to an additional tax band is of note given the recent suggestion that a middle rate of income tax of 30 per cent is being considered by the Government in order to ease the pressure on middle-income earners. Overall the “cost of living budget” cannot come too soon given the headwinds we are facing and indeed as highlighted by the IMF.

Please note this article first featured in the Business Post on Sunday, 24 July 2022 and was re-published kindly with their permission on our website.