On August 10th the Tax Strategy Group published ten papers on various options for tax policy changes for Budget 2023. The papers cover the economic and fiscal context within which the taxation system operates following the recent pandemic and in light of the current cost of living increases, and future challenges. Key proposals include income tax indexation (adjustment of tax credits and income tax rate bands in line with inflation and/or wage growth), and a potential third rate of income tax. Other papers cover climate action initiatives, corporation tax, VAT and capital taxes.
The Tax Strategy Group (TSG) has been in place since the early 1990’s and is chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of Civil Service Departments and Offices. The TSG is not a decision making body - the papers are simply a list of options and issues to be considered by the Government in the Budgetary process.
The usual and perhaps most straightforward option for Government is to adjust the income tax bands and credits so that lower and middle income earners don’t climb into the higher 40%tax bracket so soon. In recent years, the bands have increased by approx. €1,000 - €1,500; however, given the current inflationary pressures, such adjustments may not go far enough this year.
The maximum proposed increases to the tax bands and credits, or the introduction of a new 30% tax rate, as suggested in the papers, would only leave a taxpayer with a maximum €1,000 additional take home pay per annum.
For a taxpayer on an average mortgage, the recently announced ECB interest rate hikes will see mortgage servicing costs increase by at least €1,000 per annum, even before any further anticipated increases. Consequently, it is clear that for many taxpayers, even the most optimistic of the proposed income tax suggestions will not make up for higher mortgage payments. Inflationary pressures are likely to continue to see other household expenditure increase next year, further compounding the hardship of lower and middle income earners
The corporation tax paper reiterates the importance of our corporate tax regime to Ireland’s economic policy, particularly in the current environment where substantial changes are being made to long-standing international tax rules by the OECD and EU. The Irish Government continues to proactively engage with partners at an EU and OECD level in shaping these changes with a view to maintaining Ireland’s international competiveness in this area.
Ireland’s corporation tax receipts have grown dramatically by approx. 100% to €15.3bn in the last 5 years. These receipts are highly dependent on the performance of the top 10 MNCs who make up over 53% of these CT receipts for 2021. This concentration risk is helped somewhat by the fact that these MNCs are spread across a range of sectors, including Manufacturing, IT and FS, which provides some protection should one sector experience a downturn. Overall the MNC sector employed over 1 million of the 2.4 million employed in the State in 2020 and so makes up a critical part of the economy.
The CT paper also includes updates on recent consultations on the potential introduction of a territorial regime, the film relief credit, the R&D tax credit and the Knowledge Development Box (KDB) regimes.
The TSG is considering adjustments required to the R&D tax credit regime to adapt to the OECD Global Anti-Base Erosion (GloBE) rules and the US Foreign Tax Credit (FTC) Regulations.
The impact of the OECD Pillar Two Subject to Tax Rule (STTR) on the KDB regime is another consideration. The paper sets out three options in terms of the future and/or continued operation of the regime:
The paper also has details of forthcoming international changes, including the OECD’s Pillar One and Two initiatives and EU proposals, and how these may impact Ireland in the future.
The temporary application of the 9% VAT rate to the tourism and hospitality sectors remains in force until 28 February 2023, and it is not envisaged that this measure will be extended beyond this date.
Similarly, the 9% VAT rate applicable to electricity and gas supplies remains in force until 31 October 2022. It would seem that there is scope for this measure to be extended which could assist in addressing the cost of energy faced by end consumers.
Changes introduced to EU VAT legislation during the year extended the breath of the goods and services that Member States may apply a lower rate of VAT to. This may include a vast array of goods and services, e.g. non-oral human and animal medicines, certain medical equipment, solar panels, bicycles and period products. Implementing such measures may reduce the cost to the end consumer and aid in addressing the cost of living crisis.
In the past number of years, there has been much discussion around reducing the VAT rate applicable to the supply and construction of housing, from 13.5% to 9%. The paper highlights the difficulties that such a change poses and questions if any benefit would be passed onto consumers. Considering this, it is unlikely that such a measure will be introduced.
This paper looks at the impact to the exchequer of increasing or decreasing the Capital Acquisitions Tax (CAT) rates and thresholds, and the potential removal of the thresholds altogether. However, it recognises the importance of inheritance between parents and children, and so cautions against dramatic changes.
A reduction in agricultural and business asset relief from CAT, and the potential yields from such changes are outlined. However, any reductions in these valuable reliefs needs to be balanced against the importance of passing on land or businesses to the next generation.
The paper notes the current CAT lifetime aggregation period for gifts and inheritances and suggests a reasonable lifetime exemption threshold such as a 15-20 year period.
The paper notes that the value of increasing or reducing the Capital Gains Tax (CGT) rate by 1% would be worth approx. €42 million to the Exchequer, assuming no behavioural change.
The future of Revised Entrepreneur Relief, a relief that provides a CGT rate of 10% on gains from disposals of certain assets, be reviewed before the end of 2024. Some amendments proposed are to encourage reinvestment, by amending the current lifetime threshold to a “per venture” threshold, or a removal of the working time requirement, where an individual must spend at least 50% of their working time in the company over 3 of the 5 years preceding the disposal.
The paper looks at stamp duty on residential property, including the 10% charge on multiple purchases, which gave rise to approximately €9.1 million in stamp duty to end April 2022. This is just one of a number of measures that have been taken by Government to ensure the proper working of the housing market.
Other stamp duty measures covered in the paper include:
This paper gives an overview of Energy taxes, and related EU developments, Carbon Tax, and Motor Vehicle Taxes, and includes consideration of relevant policy options and challenges.
The paper attempts to balance taxation as an important “climate action policy lever” while using fiscal measures to incentivise the use of greener fuels and technologies with a move away from more pollutant fossil fuels. The TSG notes that the 2020 Programme for Government and the 2021 Climate Action Plan have set out the background for the implementation of policy framework in the climate action area. Some policy measures such as the carbon tax have already been introduced but the TSG does look at other measures such as the removal of fossil fuel subsidies (particularly in the transport sector by 2024).
Electricity tax receipts contribute little to the Exchequer, the annual yields in the last six years have been consistently below €6 million. The paper tells us that this is due to low rates of taxation applied and the wide range of reliefs available. The TSG recommends that the Electricity tax measures should be reviewed to ensure that they are in line with the Government’s commitment and legally binding path to carbon neutrality by 2050. This target involves a gradual phasing out of fossil fuels from the economy and a greater reliance on electricity supplied as renewable energy. If no changes to tax policy occur, this will lead to a loss in Exchequer revenue. The paper recommends that if the shortfall in Exchequer revenue arising from the transition to carbon neutrality is to be met in some way through electricity tax revenue, a change to the current reliefs and rates may be needed.
Taxation relating to company cars has a role to play in helping to curb CO2 emissions, and also need to be reviewed.
Press Release
Budget 2023: Tax Strategy Group Papers
10 Aug 2022
On August 10th the Tax Strategy Group published ten papers on various options for tax policy changes for Budget 2023. The papers cover the economic and fiscal context within which the taxation system operates following the recent pandemic and in light of the current cost of living increases, and future challenges. Key proposals include income tax indexation (adjustment of tax credits and income tax rate bands in line with inflation and/or wage growth), and a potential third rate of income tax. Other papers cover climate action initiatives, corporation tax, VAT and capital taxes.
The Tax Strategy Group (TSG) has been in place since the early 1990’s and is chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of Civil Service Departments and Offices. The TSG is not a decision making body - the papers are simply a list of options and issues to be considered by the Government in the Budgetary process.
Income Tax
The usual and perhaps most straightforward option for Government is to adjust the income tax bands and credits so that lower and middle income earners don’t climb into the higher 40%tax bracket so soon. In recent years, the bands have increased by approx. €1,000 - €1,500; however, given the current inflationary pressures, such adjustments may not go far enough this year.
The maximum proposed increases to the tax bands and credits, or the introduction of a new 30% tax rate, as suggested in the papers, would only leave a taxpayer with a maximum €1,000 additional take home pay per annum.
For a taxpayer on an average mortgage, the recently announced ECB interest rate hikes will see mortgage servicing costs increase by at least €1,000 per annum, even before any further anticipated increases. Consequently, it is clear that for many taxpayers, even the most optimistic of the proposed income tax suggestions will not make up for higher mortgage payments. Inflationary pressures are likely to continue to see other household expenditure increase next year, further compounding the hardship of lower and middle income earners
Corporation tax
The corporation tax paper reiterates the importance of our corporate tax regime to Ireland’s economic policy, particularly in the current environment where substantial changes are being made to long-standing international tax rules by the OECD and EU. The Irish Government continues to proactively engage with partners at an EU and OECD level in shaping these changes with a view to maintaining Ireland’s international competiveness in this area.
Ireland’s corporation tax receipts have grown dramatically by approx. 100% to €15.3bn in the last 5 years. These receipts are highly dependent on the performance of the top 10 MNCs who make up over 53% of these CT receipts for 2021. This concentration risk is helped somewhat by the fact that these MNCs are spread across a range of sectors, including Manufacturing, IT and FS, which provides some protection should one sector experience a downturn. Overall the MNC sector employed over 1 million of the 2.4 million employed in the State in 2020 and so makes up a critical part of the economy.
The CT paper also includes updates on recent consultations on the potential introduction of a territorial regime, the film relief credit, the R&D tax credit and the Knowledge Development Box (KDB) regimes.
The TSG is considering adjustments required to the R&D tax credit regime to adapt to the OECD Global Anti-Base Erosion (GloBE) rules and the US Foreign Tax Credit (FTC) Regulations.
The impact of the OECD Pillar Two Subject to Tax Rule (STTR) on the KDB regime is another consideration. The paper sets out three options in terms of the future and/or continued operation of the regime:
The paper also has details of forthcoming international changes, including the OECD’s Pillar One and Two initiatives and EU proposals, and how these may impact Ireland in the future.
Value Added Tax
The temporary application of the 9% VAT rate to the tourism and hospitality sectors remains in force until 28 February 2023, and it is not envisaged that this measure will be extended beyond this date.
Similarly, the 9% VAT rate applicable to electricity and gas supplies remains in force until 31 October 2022. It would seem that there is scope for this measure to be extended which could assist in addressing the cost of energy faced by end consumers.
Changes introduced to EU VAT legislation during the year extended the breath of the goods and services that Member States may apply a lower rate of VAT to. This may include a vast array of goods and services, e.g. non-oral human and animal medicines, certain medical equipment, solar panels, bicycles and period products. Implementing such measures may reduce the cost to the end consumer and aid in addressing the cost of living crisis.
In the past number of years, there has been much discussion around reducing the VAT rate applicable to the supply and construction of housing, from 13.5% to 9%. The paper highlights the difficulties that such a change poses and questions if any benefit would be passed onto consumers. Considering this, it is unlikely that such a measure will be introduced.
Capital taxes
This paper looks at the impact to the exchequer of increasing or decreasing the Capital Acquisitions Tax (CAT) rates and thresholds, and the potential removal of the thresholds altogether. However, it recognises the importance of inheritance between parents and children, and so cautions against dramatic changes.
A reduction in agricultural and business asset relief from CAT, and the potential yields from such changes are outlined. However, any reductions in these valuable reliefs needs to be balanced against the importance of passing on land or businesses to the next generation.
The paper notes the current CAT lifetime aggregation period for gifts and inheritances and suggests a reasonable lifetime exemption threshold such as a 15-20 year period.
The paper notes that the value of increasing or reducing the Capital Gains Tax (CGT) rate by 1% would be worth approx. €42 million to the Exchequer, assuming no behavioural change.
The future of Revised Entrepreneur Relief, a relief that provides a CGT rate of 10% on gains from disposals of certain assets, be reviewed before the end of 2024. Some amendments proposed are to encourage reinvestment, by amending the current lifetime threshold to a “per venture” threshold, or a removal of the working time requirement, where an individual must spend at least 50% of their working time in the company over 3 of the 5 years preceding the disposal.
The paper looks at stamp duty on residential property, including the 10% charge on multiple purchases, which gave rise to approximately €9.1 million in stamp duty to end April 2022. This is just one of a number of measures that have been taken by Government to ensure the proper working of the housing market.
Other stamp duty measures covered in the paper include:
Climate and Tax
This paper gives an overview of Energy taxes, and related EU developments, Carbon Tax, and Motor Vehicle Taxes, and includes consideration of relevant policy options and challenges.
The paper attempts to balance taxation as an important “climate action policy lever” while using fiscal measures to incentivise the use of greener fuels and technologies with a move away from more pollutant fossil fuels. The TSG notes that the 2020 Programme for Government and the 2021 Climate Action Plan have set out the background for the implementation of policy framework in the climate action area. Some policy measures such as the carbon tax have already been introduced but the TSG does look at other measures such as the removal of fossil fuel subsidies (particularly in the transport sector by 2024).
Electricity tax receipts contribute little to the Exchequer, the annual yields in the last six years have been consistently below €6 million. The paper tells us that this is due to low rates of taxation applied and the wide range of reliefs available. The TSG recommends that the Electricity tax measures should be reviewed to ensure that they are in line with the Government’s commitment and legally binding path to carbon neutrality by 2050. This target involves a gradual phasing out of fossil fuels from the economy and a greater reliance on electricity supplied as renewable energy. If no changes to tax policy occur, this will lead to a loss in Exchequer revenue. The paper recommends that if the shortfall in Exchequer revenue arising from the transition to carbon neutrality is to be met in some way through electricity tax revenue, a change to the current reliefs and rates may be needed.
Taxation relating to company cars has a role to play in helping to curb CO2 emissions, and also need to be reviewed.
Experts / Authors
Peter Vale
Peter has experience in international corporate tax structuring including; financing structures, company migrations and international reorganisations/reconstructions. He has advised clients on the tax aspects of property investments, both domestic and international.
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