Key messages from the Irish Minister for Finance, Michael McGrath, and the Irish Minister for Public Expenditure and Reform, Paschal Donohoe, contained in their Budget speeches on 10 October 2023:
On implementation of international tax reform measures
“I will be publishing legislation to implement the 15% minimum effective tax rate for large companies as provided for under the OECD Pillar Two Agreement. This is a once-in-a-generation reform to our corporation tax system and marks the culmination of a ten-year, global project to reform the taxation of multinational enterprises.”
On windfall corporate tax receipts
“My Department estimates that ‘windfall’ corporation tax receipts now stand at around €10 - €12 billion. […] If we remove ‘windfall’ corporation tax receipts, we would record an underlying General government deficit of €2 billion in 2023. Therefore, we must use these windfall receipts wisely.”
On increases in the cost of living
“Despite our positive economic performance, inflation continues to make life very difficult for many people. I welcome the fact that inflation has fallen but I am acutely aware that household budgets are stretched for many individuals and families.”
The Irish Minister for Finance, Michael McGrath, and the Irish Minister for Public Expenditure and Reform, Paschal Donohoe, made their respective Budget speeches to the Irish Parliament on Tuesday, 10 October 2023.
This year’s Budget has been shaped in the context of increasing global economic uncertainty, a continuing cost of living crisis precipitated by factors which also impact global and domestic business, climate change and extensive international tax reform. The focus of this Budget was expressed to be primarily to relieve the cost of living pressures without aggravating inflation and to maintain a stable taxation base in the face of declining corporation tax revenues and stagnating economic growth. The Budget also aims to maintain tax reliefs for corporates and continue the implementation of global tax reforms.
As such while there was fiscal space to introduce such relieving measures for domestic taxpayers there were minimal changes announced which would be of material interest to the multinational section outside the anticipated changes required to implement the OECD Pillar 2 measures and the 15% effective corporate tax rate for affected taxpayers.
Further detail in respect of the measures announced, apart from those introduced with immediate effect by way of Financial Resolution later tonight, will be contained in the Finance (No. 2) Bill 2023, which will be published on 19 October 2023. This should be signed into law by late December.
At this stage, the key points of interest for the international business community include:
OECD Pillar 2 – introduction of the 15% minimum corporation tax rate for multinational entities with global turnover exceeding €750m by way of a domestic top-up tax with effect from 1 January 2024.
As part of Ireland’s implementation of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’), the Pillar 2 minimum tax rate of 15% on multinational entities with a global turnover of more than €750 million will apply from 1 January 2024. Ireland’s headline corporation tax rate of 12.5% will be retained, with an additional ‘domestic top-up tax’ being imposed on entities falling within the scope of the new rules to reach the required 15%.
As an aside, Taoiseach Leo Varadkar has indicated that Ireland will not support a proposed EU levy of 1.5% on corporate profits in light of Ireland’s commitment to Pillar 2 and the associated increase in corporation tax to 15%.
R&D Tax Credit – extension of the R&D Tax Credit to 30% for qualifying R&D expenditure, and an increase of the claim threshold to €50,000.
The current R&D credit of 25% for qualifying expenditure will be increased to 30%. This will maintain the net value of the existing credit for entities falling under the new 15% corporation tax rate and provide an increase of the credit in real terms for smaller businesses.
The claim threshold will increase from €25,000 to €50,000 and it will be claimable in year 1, as opposed to over the course of three years.
Key Employee Engagement Programme – commencement of outstanding 2022 amendments to the programme following EU State Aid approval.
Film Tax Credit – increase in the current project cap on qualifying expenditure from €70 million to €125 million subject to EU State Aid approval.
Bank Levy – revision of the bank levy to increase revenues to €200m for 2024.
The bank levy was introduced in 2014 and was due to expire at the end of 2023. A revised version will be adopted for 2024 which will target revenues of €200m. It will apply to those banks that received financial assistance from the State during the banking crisis.
Capital Gains Tax Angel Investor Relief – introduction of a new Capital Gains Tax (‘CGT’) relief to encourage Angel Investment for innovative startups.
Investors in innovative start-up SMEs who invest for a period of at least three years can benefit from a CGT rate of 10% as opposed to 33% for gains arising from a qualifying investment in a qualifying company up to a maximum gain of twice their initial investment. The investment must be in the form of fully paid-up and newly issued shares costing at least €10,000 and constituting between 5% and 49% of the ordinary issued share capital of the company.
Residential Zoned Land Tax (‘RZLT’) – deferral of the liability date of the RZLT by one year.
The RZLT liability date will be deferred by one year to allow for a review of RZLT maps to take place in 2024 and give affected people further opportunities to engage with the RZLT and mapping processes.
Carbon Tax – increase in the rate of carbon tax per tonne of carbon dioxide for petrol and diesel will increase from €48.50 to €56 from 11 October.
Revenues raised from the carbon tax will be used to part-fund a national retrofitting programme and to support farmers in the green transition.
Establishment of National Funds – the Future Ireland Fund and the Infrastructure, Climate and Nature Fund will be established, part-funded by windfall corporation tax receipts.
0.8% of GDP per year will be invested into the Future Ireland Fund from 2024 to 2035. This will amount to €4.5bn for 2024, and seed funding of over €4bn will be transferred from the National Reserve Fund, which will be dissolved. The aim of the fund is to assist the State in meeting its running costs in particular to contribute to age-related spending as a result of Ireland’s ageing population.
The Infrastructure, Climate and Nature Fund will receive some funding from windfall corporation taxes and will operate counter-cyclically. It will grow by €2bn per year for seven years, with the first €2bn contribution coming from the National Reserve Fund.
We would anticipate that there will be additional measures included in the Finance Bill that will be of interest to clients and we will issue further updates when it is published.
Outbound Payments – while not addressed in the Budget, the Department of Finance Tax Strategy Group has indicated that Finance (No. 2) Bill 2023 will introduce some changes to the withholding tax regime applying to interest, royalty and dividend payments made to associated entities in no or zero-tax jurisdictions from 1 January 2024.
Earlier this year, the Department of Finance published a Feedback Statement on proposed new legislation to be introduced in Finance (No. 2) Bill 2023 and applying to outbound payments to address certain double non-taxation outcomes. It is understood that the Outbound Payment regime may introduce changes to the existing withholding tax provisions on interest, royalty and dividend payments where they are paid to associated entities in jurisdictions on the EU list of non-cooperative jurisdictions, no-tax jurisdictions and zero tax jurisdictions. Broadly an Irish company will be associated with an entity where it holds 50 per cent of the shares, votes or economic interests in the other or whether a third entity holds such rights in respect of both entities.
DAC7 Joint Audits – while not addressed in the Budget, the Tax Administration Liaison Committee has indicated that Finance (No. 2) Bill 2023 will implement the ‘joint audit’ provisions in Directive (EU) 2021/514 (DAC7), providing a legal framework for EU tax authorities to jointly carry out cross-border audits.
DAC7 was partially introduced into Irish law in the Finance Act 2022 by providing that a foreign tax official can be present or participate in an administrative enquiry conducted in Ireland. It did not, however, address the conduct of joint audits as set out in DAC7. It is intended that Finance (No. 2) Bill 2023 will further implement the DAC7 directive in providing the legal framework to allow cross-border joint audits to take place in Ireland. The new provisions will set out the rights and obligations of the officials who participate in the joint audits.
Future Policy Announcements
Funds Sector Review - the ongoing Funds Sector Review, which A&L Goodbody has contributed to, is on track to make a report in summer 2024, at which point the Minister for Finance will consider any changes to the current framework.
The review will include consideration of Life Assurance Exit Tax, and the taxation of funds, including Exchange Traded Funds for Irish investors more generally. A&L Goodbody has previously fed into the Funds Sector 2030 consultation.
Participation Exemption – whilst there are no specific changes proposed in this Budget, the Government has launched a policy review with respect to the introduction of a participation exemption for dividends to be brought into effect from 2025 pursuant to Finance Bill 2024 as part of a move towards a more territorial system of corporation tax.
Ireland operates a worldwide system of taxation such that Irish tax resident companies are taxed on their worldwide profits with double taxation relief for foreign tax suffered on foreign source profits. On the other hand, many competing jurisdictions operate a territorial type system by exempting certain foreign income from tax (i.e. commonly known as a participation exemption). Such a participation exemption generally applies to dividends from foreign direct investments and gains on the disposal of those investments. While under Ireland’s existing worldwide system of taxation, in most cases, there is ultimately no additional Irish tax liability the introduction of a participation exemption for foreign source dividends would be a welcome simplification and should make Ireland more attractive internationally. The consultation on the introduction of a participation exemption is due to close in mid-December with an intention to introduce legislation next year in Finance Bill 2024.
Interest Deductibility Consultation – the Minister for Finance has committed to engaging with stakeholders on the complex issue of Ireland’s current interest deductibility regime over the coming period.
Share-Based Remuneration – the Department of Finance will be launching a public consultation on share-based remuneration.
The consultation will recognise the increasing importance that businesses place on such remuneration for rewarding and retaining talent. Stakeholders are encouraged to submit their views on these initiatives.
For further information, please contact a member of the A&L Goodbody Tax team.