Budget 2022 was introduced by the Minister for Finance with the stated aim of investing in our future, of meeting the needs of today, while putting the public finances on a sustainable path. Last year, the Budget was shaped by the risks posed by Brexit and COVID-19. 

This year the focus turns to the final stages of the Government support for the pandemic recovery, restoring public services and living standards, and repairing the public finances. 

In summary, the tax measures announced were €0.5 billion of an overall budgetary package of €4.7 billion. To deal with the continued impact of COVID-19 on certain sectors of the economy, the minister announced the welcome extension of both the Employment Wage Subsidy Scheme (EWSS) until 30 April 2022, and the reduced VAT rate of 9% for the tourism and hospitality sector until 31 August 2022. 

The minister emphasised the importance of tackling both housing and climate change, and supporting entrepreneurs and the wider business community as the core missions of the current Government, which can be seen in a number of the measures announced including:

  • The extension of the Help-to-Buy scheme to the end of 2022 
  • The extension of pre-letting expenses for landlords to the end of 2024 
  • An increase in carbon tax of €7.50/tonne 
  • A tax disregard of €200 for personal income of households who sell excess electricity back to the grid 
  • Extension of, and amendments to, the accelerated capital allowances scheme for energy efficient equipment up to the end of 2024 
  • Extension of, and improvement to, the Employment Investment Incentive (EII) scheme for a further three years 
  • Extension of the relief for certain start-up companies up to the end of 2026 
  • Subject to European state aid approval, the introduction of a new tax credit for digital games to support to the design, production and testing of a digital game 

The minister outlined the importance of the Government’s decision to join the OECD international tax agreement in ensuring the minimum effective rate of tax for companies with revenues more than €750 million was set at 15%. This rate will apply to approximately 1,500 companies once introduced. The minister in turn reinforced the commitment to the 12.5% rate of corporate tax for companies operating here. 

As expected, some small changes were announced in relation to the income tax standard rate band and income tax credits, along with some minor amendments to the USC bands. The minister also announced an income tax deduction for remote working of 30% of the cost of vouched heat, electricity and broadband to support remote working. 

The total budgetary package of €4.7 billion was based on the Summer Economic Statement which forecasted a combined deficit of €34.5 billion for 2021 and 2022. Based on recent economic activity, this deficit is now forecasted at €21.5 billion, which represents a reduction of nearly 40%. Despite improving public finances, the budgetary package did not change. Recognising that our debt level needs to be managed, it is hoped that there will be investment in more measures to maintain our attractiveness to inward investment and entrepreneurs in the coming year.

EU Climate Action changes

On 14 July, the European Commission (EC) passed a crucial milestone by adopting the EU “Fit for 55” package to transform the European economy. The package of interconnected legislative proposals will align the EU’s climate, energy, land use, transport and taxation policies with the target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. 

This commitment is part of the EU Green Deal, which is a comprehensive package of tax and non-tax measures aimed at developing a growth strategy whereby there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. Within its toolkit the EU is proposing several tax and carbon price reforms as part of the Green Deal, namely: 

  • Extension of the Emissions Trading System (ETS), including possible phasing out of existing free permit allocations for many participants. 
  • Introduction of the Carbon Border Adjustment Mechanism (CBAM). 
  • Reform of the Energy Taxation Directive (ETD). 

Emissions Trading System

The EU ETS puts a price on carbon and lowers the cap on emissions from certain economic sectors every year. Over the past approximately 16 years it has reduced emissions from power generation and energy-intensive industries by 43%. The EC is proposing to lower the overall emission cap even further, increase annual rates of reduction and phase out free emission allowances for aviation. A new separate emissions trading system to address the lack of emissions reductions in road transport and buildings is also proposed. 

With the ETS carbon price above €60 per tonne as of October 2021, this mechanism now has material economic implications for corporates and has the potential to influence corporate decision making. 

Carbon Border Adjustment Mechanism

Increasing ambitions for emissions reduction raises concerns about potential “carbon leakage”. This is the concern that consumers/producers in the EU with higher emissions ambition will be encouraged to purchase imports or move operations to low ambition regions where the cost of production is lower. 

In order to address risks of carbon leakage from these developments, the EC released a consultation process in 2020 on the design features of alternative approaches to introducing a CBAM. This could take a number of forms, including: 

  • A tax on imports (a carbon border tax imposed through the tariffs); 
  • Importers being incorporated within the existing ETS; 
  • A mechanism based on the ETS but involving a separate system for importers; or 
  • A new (excise-style) tax charged both within the EU and on imports, based on the average carbon intensity of certain products (sometimes referred to as a carbon excise tax). 

At this preliminary stage, it is understood that the products proposed to be covered in the first instance will include aluminium, steel, cement, glass, paper, and heavy chemicals. The precise form which the proposed CBAM will take will only become clear once the EC tables draft legislation in the form of a proposed directive. 

Energy Taxation Directive – what is changing?

The existing Energy Taxation Directive (ETD) is close to 20 years old and does not reflect the current developments in green energy. The reformed ETD has several ambitions; to address harmful effects of energy tax competition; securing revenues for EU Member States from green taxes; removing outdated exemptions and incentives of fossil fuels usage and promoting investment in new and innovative green industry. 

To achieve these ambitions, the EC is proposing a new structure of tax rates based on the energy content (expressed in EUR/GJ, e.g. gas oil & petroleum at €10.75/GJ, renewable Hydrogen at €0.15/GJ) and broadening of the taxable base by adding products and removing exemptions such as those in the areas of aviation and shipping fuels. The ETD proposal suggests minimum rates of taxation that encourage a switch to more sustainable fuels while reflecting the extent to which they are at risk of carbon leakage. There is also a 5-year review period to keep the ETD up to date. 

As the new ETD is a revision of an existing directive, its unanimous acceptance by all members of the EU Council is required. Provided unanimity is achieved, the ETD should come into force in January 2023. 

What does this mean for corporates?

Companies that procure or consume products covered within the scope of the EU ETS, e.g. manufacturing, could face significant additional cost pass-through from existing suppliers if the CBAM is implemented, due to the significant emissions occurring in geographies without commensurate low carbon policies and the emissions associated with transport of the goods to the EU. Corporates should ensure that they understand the geographical composition of their emissions to enable them to undertake a supply chain review, where required, making conscious cost versus carbon trade-offs and ensuring the resilience of their pricing model to the proposed changes. 

The EC measures above are part of a programme of interventions, with individual components categorised as “pricing”, “targets” or “rules”; that will operate together to achieve its objectives. These undertakings are a proactive approach to using tax policy as an instrument to fight climate change, a potential feature of the EU landscape for many years to come.