The 2023 budget should include measures to help future-proof Ireland’s economy, says KPMG in its pre-budget submission. Specifically, it should aim to reduce the impact of inflation through income tax indexation, retain Ireland’s FDI competitiveness via personal tax reform, support our SME sector by reforming KEEP and EIIS and use our tax system to support a net-zero economy.
Index key income tax and other tax reliefs
KPMG calls for a statutory mechanism to index personal tax credits and rate bands, USC and PRSI thresholds, as well as capital tax thresholds to reduce the impact of inflation on taxpayers’ tax bills and reduce the pressure for pay rises.
In its Pre-Budget 2023 submission, KPMG notes the Government’s commitment to increase tax credits and rate bands as incomes increase but recommends that indexation be put on a statutory footing and extended to include the indexation of USC and PRSI thresholds, the CAT tax exemption thresholds along with the reintroduction of indexation relief for CGT purposes to ensure that taxpayers pay tax on real gains on the sale of assets.
Tom Woods, Partner and Head of Tax and Legal with KPMG Ireland says, “by maintaining the “real” value of tax reliefs, bands and credits, businesses will be under less pressure to deliver pay increases to attract and retain talent. Furthermore, given the current high inflationary environment and the relatively high CGT and CAT tax rates of 33%, it is time to re-introduce CGT indexation relief and to index the CAT tax exemption thresholds.”.
Ireland needs to stay competitive for FDI
In its submission, KPMG outlines the importance of safeguarding Ireland’s attractiveness as a destination for talent and foreign direct investment. Ireland should make strides in reducing the marginal cost of employment which is high by international standards. Ireland should also remove unnecessary complexity from the taxation of foreign dividends and branch profits, and the rules on interest deductions to reduce the cost of doing business here and create a more clear, simple, and transparent corporate tax code.
Increasing the R&D tax credit to 35% for the first €1m of qualifying expenditure and enhancing the Special Assignment Relief Program to attract skilled professionals to live and work here could transform Ireland into an international hub for innovation.
Tom Wood says, “with the impending introduction of BEPS 2.0, it is critical that Ireland takes steps to remain competitive. At a minimum Ireland needs to align its rules on the taxation of dividends and branch profits with our competitors and remove obsolete tax provisions that are giving rise to unnecessary complexity and costs for businesses”.
Taxation of professional landlords
KPMG’s submission highlights the negative impact of the housing crisis on FDI investment decisions and the supply of skilled workers in Ireland. The taxation of professional landlords should be reformed to allow them to access the same tax rates, expenses deduction rules, and capital tax reliefs as enjoyed by businesses operating trades.
Targeted capital tax incentives can also play a role in driving the supply of land for residential development and VAT on the supply of new houses should be suspended temporarily to increase the supply of affordable housing.
According to Tom Woods “urgent tax reform is necessary to level the playing field for professional landlords who make a very important contribution to a sector of the Irish rental market not typically the focus of international institutional investors”.
Supporting domestic entrepreneurship
A key tenet of Ireland’s tax policy should be to support domestic entrepreneurship. Given the uncertain global business landscape, it is more important than ever that indigenous Irish businesses and entrepreneurs are supported. In its submission, KPMG says that a special CGT rate of 20% should be introduced to drive capital investment in the SME sector.
The Employment and Investment Incentive Scheme is inaccessible for many SMEs due to the sheer complexity of the rules underlining the relief. Significant reform of the Key Employee Engagement Programme share option scheme is also necessary for the SME sector to attract and retain skilled workers.
Tom Woods says “tax reliefs such as the EII scheme and KEEP were established to support the SME sector. However, there are issues with these reliefs which need to be addressed to deliver the intended support to SMEs”.
Tax measures to promote sustainability
The tax system has the potential to be a powerful tool in the drive for sustainability in Ireland. KPMG recommends introducing tax supports to mobilise private finance for green investment via green bonds and Irish pensions. The R&D tax credit should be enhanced to incentivise the development and use of green technology.
Tax reliefs can be effectively used to accelerate the transition to electric and hybrid vehicles, the retrofitting of homes and commercial property, and to support the agri-sector transition to more sustainable practices.
Tom Woods emphasises KPMG’S view on such measures noting that “Tax incentives can be used as part of a suite of policy measures to drive the rapid and substantial behavioural change necessary to deliver on Ireland’s ambitious zero emissions targets”.