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Ireland’s economy will need to be rebooted following the COVID-19 crisis and increasing taxes is not the way to fund it writes Tom Woods, KPMG’s Head of Tax and Legal Services in Ireland.

Notwithstanding the very serious challenges faced by many businesses, the country could be relatively well placed to deal with the economic fall-out from the pandemic. However, we face a number of difficult choices in terms of how best to support business during the crisis. The policies needed to assist the recovery was one of the themes of a recent KMPG webinar “Ireland in a Changing World.” I was joined on the panel, moderated by broadcaster Matt Cooper, by IIEA Chief Economist Dan O’Brien and my colleague KPMG Global Head of Tax & Legal Jane McCormick. What follows is some brief perspectives from our panellists on some of the key issues. I encourage you to take the time to watch the webinar recording below.

The economic backdrop

The crisis is playing out against a backdrop of political discussions about a new government and a range of international issues. These include the challenge of ongoing disruption to global trade, the US election and the ever present risk of protectionism and trade wars. Meanwhile, the importance of having a government in place in time for the EU Council meeting in June ahead of the next Brexit deadline cannot be understated.

The economic damage already done by COVID-19 is far worse than anything which could be expected from even the worst Brexit outcome. While China appears to be emerging from the worst of COVID-19, closer to home, retail sales data from Spain and France reported a 15 per cent decline in March.

Meanwhile in Ireland, half of the two million people who were employed in the private sector just a few months ago are now in receipt of the COVID-19 payment or are having their wages supported by the COVID-19 Subsidy Scheme. On a more upbeat note, there has been a strong upward spike in industrial production during March. This has been attributed to the pharma sector, which accounts for more than half of Ireland’s exports in value terms, and IT which is the country’s second biggest exporter. These sectors will have a major role in driving any recovery just as they did following the last recession.

Our discussion also outlined just why ECB support is critically important. As economist and fellow panellist Dan O’Brien noted “The only reason many Eurozone governments are able to borrow is that the ECB will buy up their bonds on the secondary markets” and it is clear that such a policy is entirely appropriate during an emergency.

The global tax picture

Countries have had to think about their national economies which can lead to a lack of cohesion in the international tax system. Looking at income taxes there is little scope to widen the base in the developed world but there is some discussion about increasing the higher rates. This contrasts to the very high rates of tax and narrow base in Ireland. On corporate taxes, whilst there may be good reasons to reduce rates to stimulate economies, it is unlikely that there will be much change on rates but there could be adjustments to reliefs and exemptions.

An Irish perspective

It is of some comfort that Ireland’s taxation profile is much healthier than it was going into the last recession. The tax take for 2019 was €59 billion, more than 25 per cent higher than the €47 billion collected in 2007 at the peak of the boom. CGT and stamp duty make up a much lower proportion of tax paid while income tax now makes up the lion’s share with corporation tax making a very significant contribution as well. The significant weighting of tax receipts towards the Manufacturing, ICT and Financial Services sectors, as mentioned sectors that are expected to perform relatively well through the crisis or are expected to rebound more quickly, should support a quicker recovery than last time.

It is clear that the economy will need to be rebooted. The key is to get cash into the hands of those most affected as quickly as possible. The austerity type measures introduced in 08-2010 are not the way to fund this reboot – sensible and effective measures designed to support viable business through additional cheap long dated funding offers the best prospect of the quickest recovery. We should also avoid funding the debt through tax increases and instead consider policy approaches that will see us reduce debt through long term economic growth.

There are a number of tax measures that can be considered to stimulate the economy including:

  • The retail and hospitality sector could qualify for a zero rate of VAT until something close to normal trading resumes and a re-introduced 9 per cent rate thereafter. This would align the benefit of the VAT saving with consumption, the more consumption, the bigger the benefit. 
  • The employer PRSI of 0.5% that applies to top up payments under the COVID-19 Wage Subsidy Scheme could also be extended to all wage payments to employees in affected sectors. This would link the benefit with employment.
  • A rental subsidy scheme along the same lines of the wage subsidy scheme could be introduced where a rental subsidy would be made available where the tenant has suffered a significant falloff in turnover, customer orders, etc.
  • The waiver on rates could be extended from 3 months to 12 months (similar to the UK) 

Improvements to incentives like Entrepreneur Relief and EIIS should also be considered to encourage the set-up of new businesses creating more employment and incentivising more equity investment.

There are many more options and how best to support businesses will require difficult decisions to be made by government. Whilst ever mindful of the scale of the huge challenges ahead, I agree with our Global Head of Tax & Legal, Jane McCormick, that Ireland is relatively well placed to get through the crisis. Our economic mix is positive and our track record of using tax policy to support economic growth is very good.

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