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Budget 2021 was ambitious in its scale.  At €17.75 billion, it is the largest budget in the history of the state, with the Government taking counter cyclical measures to support the economy, writes Tom Woods, KPMG’s Head of Tax.

A global pandemic putting both lives and livelihoods at risk, the shadow of a no deal Brexit, geopolitical complexities and the international tax framework under review, meant there was limited room for manoeuvre in the shape of tax giveaways.  In total a net €270 million of the budget, or roughly 1.5 per cent of the overall budget, was allocated to tax measures.

So, what changed?

There were two revenue raising measures announced.  These changes were in line with the Government’s stated policy to tax negative externalities, that is activities that have a negative impact on the environment, people or society. The first revenue raising measure was the expected increase in carbon tax by €7.50 per tonne/CO2 which took effect from midnight on budget night in respect of auto fuels and from 1 May 2021 in respect of other fuels.  This change is part of a series of incremental increases in carbon tax in order to bring the rate to €100 per tonne/CO2 by 2030. This year’s change will mean an approximate 2.5c increase on the price of a litre of diesel and 2c on the price of a litre of petrol, with the measure expected to raise €108 million next year. The second increase was to excise duty on tobacco products, which is expected to raise an additional €57 million annually. In keeping with the objective of promoting low carbon technologies, the existing scheme of accelerated capital allowances for investment in energy efficient equipment is being extended for a further three years and a new basis for calculating vehicle registration tax (VRT) is being introduced from the start of 2021, which will reward consumers choosing vehicles with lower carbon emissions and tax more heavily those vehicles that have higher emissions.

Exchequer receipts

Despite the challenges brought about by Covid-19, exchequer receipts have held up very well which provided the Ministers with a good platform to build the budget on.  Corporate tax receipts, in particular, have been remarkably resilient and are expected to be just over €1.4 billion ahead of last year.  This reflects the concentration of foreign multinationals trading in the ICT, manufacturing and financial services sectors here, all sectors that have performed relatively well through the pandemic.  The numbers, however, mask the difficulties that businesses in the domestic economy are experiencing.  Both Ministers were very alive to this and the main focus has been on supporting badly affected businesses and sectors.

For business, there were a number of measures announced that will be broadly welcomed including the COVID Restrictions Support Scheme (CRSS) which will entitle impacted businesses to a weekly payment of up to €5,000.  The hospitality and tourism sector were also given the reduction in the VAT rate from 13.5% to 9% that they were looking for. This takes effect from 1 November this year until 31 December 2021.  This is in addition to the supports made available to these sectors and the broader reduction in the standard VAT rate which was reduced from 23% to 21% from the start of September to 28 February 2021.  

Other measures

Other business measures included an extension of the Knowledge Development Box (KDB) regime for a further 2 years.  A recently published report from the Revenue Commissioners indicates that there were less than 10 KDB claims in 2018.  This is an EU approved scheme and hopefully will see much more take up in the coming year.  It dovetails with a need to focus on more R&D to ensure businesses continue to grow into the medium and longer term.  The qualifying spend on R&D has steadily decreased over the last number of years which is concerning.

The Government also took the opportunity again to reaffirm Ireland’s commitment to the 12½ per cent corporation tax rate and announced that they will publish an update on Ireland’s Corporation Tax Roadmap.  This will build on the significant action taken to-date on corporation tax reform and outline further areas for consideration, consultation and action over the coming months and years. 

BEPS Framework

The update on the Roadmap will also consider further the reports published by the OECD BEPS Inclusive Framework recently on its work to address the tax challenges of digitalisation and low taxed profits.  The OECD work places risk on our tax base and estimates reported suggest it could reduce corporate tax receipts by between €800 million - €2 billion. What is key is that we feed into the BEPS consultative process and reflect the perspectives of smaller nations and the importance of retaining certain rights over tax policy.  

Remaining attractive to international investment is critical to our emergence from this crisis.  The benefits are not just limited to corporate tax receipts, with income tax receipts also heavily supported by the multinational sector, again evidenced by the projected modest reduction in income tax in 2020 against a backdrop of 16 per cent unemployment.  We need to ensure over the medium term that we bring down the high tax burden on higher earners to promote more job opportunities and more expansion of businesses.  The trickle down benefits into the economy from this workforce, and these businesses, result in more consumption and higher VAT receipts as a consequence, which also needs to be factored into the overall contribution. 

What didn’t change?

The main missed opportunity in Budget 2021 in my view was that there was no change in our capital gains tax rate (CGT), which at 33 per cent, is one of the highest rates in the OECD. People investing and putting cash into businesses and other assets have to contend with this high rate of CGT and this acts as a disincentive to people considering investing in Irish businesses.  A reduction in CGT would  have contributed to the type of innovation led recovery that Ireland now needs, by incentivising innovative entrepreneurs and driving additional investment and activity in the domestic economy.  Some of the significant increases in household savings over the last few months of over €5 billion could be used to invest in businesses with supportive tax policies.

A reduction in CGT could also increase exchequer returns and there is precedent to support this. In late 1997, Ireland’s CGT rate was reduced from 40 per cent to 20 per cent, which resulted in a five -fold increase in its yield over the following four years, rather than a decrease as may have been expected. 

What next?

The sustainability of exchequer receipts will be a key focus of the newly established Commission on Welfare and Taxation, which has been tasked to review all existing tax measures and expenditures having regard to the taxation policies in other similar-sized open economies in the OECD. There is a significant opportunity through this review for a fresh look at how tax is organised in Ireland and for new thinking around how our tax system could be structured from its findings.

In the meantime, standing back, this was an extremely difficult Budget for any government to frame, and the focus of it was quite rightly targeted at the most affected areas of our economy, and on protecting the lives of our people.

The Government will take on significant borrowing to fund Budget 2021. There clearly is not, however, a blank chequebook and as a fuller reopening of the economy is going to take much longer than initially anticipated, discretion on spending will be required. A key aim for the next phase needs to be ensuring that the funding as part of Budget 2021 is released and deployed efficiently and effectively, to those who need it most, while striking the right balance between protecting the health of our people and supporting the economy in its recovery. The details published in the Finance Bill and the expected publication of the National Economic Plan next month should provide more clarity on what’s next for our economy. 

This article was first published in the Sunday Business Post and is reproduced here with their kind permission.

Get in touch

For further information on any of the potential Budget measures mentioned in this article, and how they might affect your business, please contact Tom Woods, Head of Tax.