Hanover

17 Aug 2022

In the context of significant increases in the cost of living, the uptick in energy prices, and geopolitical instability, the future of taxation in Ireland has become even more relevant for both businesses and citizens. The Department of Finance in the Republic of Ireland recently published the Tax Strategy Group Papers ahead of Budget 2023. They outline several options and recommendations for the Minister for Finance, Paschal Donohoe, in the run-up to Budget 2023 on September 27th 

The Tax Strategy Group (TSG) has been in place since the early 1990s and has been involved in shaping economic policy ever since. Although the TSG is not a decision-making body, the TSG papers provide an indication as to the Government’s taxation priorities ahead of Budget 2023 and Finance Bill 2022. Any policy changes listed in the Tax Strategy Papers, and agreed to by Minister Donohoe with Cabinet approval, will be implemented in the Finance Bill, unless stated otherwise.  

With respect to income tax, while the ‘benefits’ could reach up to two million taxpayers, it is difficult to foresee the real and tangible differences these recommendations could offer to the typical Irish taxpayer.

Hanover Dublin’s team has analysed these papers and below provides a high-level overview of the recommendations on income tax, corporation tax, and climate taxation, as well as VAT measures.  

Taxation Measures under Consideration

Income tax  

Some of the more headline grabbing elements are the three options regarding income tax: full indexation, partial indexation, and a third rate of income tax.  

Full indexation is the adjustment of tax credits and income tax rate bands in response to inflation and or wage growth. The TSG offers two options with respect to this: a 3 per cent increase in income tax, and a 4 per cent increase. Partial indexation suggestions mean increasing tax rate bands in three amounts, by: €1,500, €2,200, and €3,000.  

The third, and last, recommendation regarding income tax is the creation of a 30 per cent rate of income tax, trying to take the burden off low- and middle-income earners considering the cost-of-living crisis. The maximum gain from these proposals is putting an estimated €1,000 back into the pockets of taxpayers 

Corporation Tax  

With respect to contentious issue of corporation tax, the TSG supplied updates on recent consultations, such as the R&D tax credit and the Knowledge Development Box (KDB) regime, the impact of the OECD Pillar Two as well as considering a territorial system of taxation.  

The TSG proposed three options for KDB:  

  • Extending it at the current effective 6.25 per cent rate, 
  • extending the KDB but increasing the rate to 9 per cent or above,  
  • or allowing the KDB to cease.  

The TSG noted that the OECD/G20 inclusive Framework on BEPS is yet to be finalised with many details still outstanding. The group also highlights that there are sensitive issues for Ireland which are not yet addressed, whilst the outcome of these discussions will only become known in time.  

Following a public consultation earlier this year, the TSG provided considerations of a territorial system of taxation. The introduction of the Pillar Two global minimum tax rate will also introduce more anti-BEPS measures into the Irish and global tax architecture. It is intended that any move towards a territorial regime, if such a decision is taken, would progress in tandem with the introduction of the GloBE rules, currently planned for Finance Bill 2023. 

Climate action and tax 

The TSG has also proposed options for the Department of Finance regarding Ireland’s drive towards environmental sustainability. The group highlights the attempts to move people away from fossil fuels and toward the use of greener fuel and technology through fiscal means. It proposes a five-year plan to increase excise on diesel to make it equal to petrol. The TSG also says a gradual phasing out of the Diesel Rebate Scheme, which benefits hauliers, should be considered in future budgets. Furthermore, Budget ‘23 may include €1.48 added to a 60-litre fill of diesel and €1.28 to a 60-litre fill of petrol. 

Electricity tax was also a topic for discussion in the TSG papers. Currently, there is a full relief from the tax for households. However, the TSG states that the revised Energy Tax Directive proposes a gradual removal of this exemption. This Directive is due to come into force, provided unanimity is reached within the EU Council, in January 2023. Once adopted, Member States must implement changes to their domestic legislation. 

VAT  

VAT accounted for 22.5% of the overall tax yield to the Exchequer in 2021, amounting to €15.4 billion – an increase of €3 billion compared to 2020. The TSG argue that increasing VAT rates would have an adverse effect on the economy, as it would negatively affect inflation, employment, the less well-off as well as affecting cross-border trade. The TSG also noted that the 9% hospitality VAT rate is envisaged to end in March 2023 and return to a 13.5% rate.  

Although it is likely that VAT rates will be untouched in upcoming budget, the TSG proposes restructuring the VAT system on a revenue-neutral basis, while also suggesting that the VAT registration thresholds should be raised for small businesses. 

Conclusion

The TSG papers outline the direction of travel for the Minister for Finance before the publication of Budget 2023. The measures within the TSG papers aim to address key economic issues such as inflation, the increase in the cost of living, heightened energy prices and international instability. The papers also aim to address other aspects of the Irish economy, such as the digitalisation of the economy, sustainability, and Ireland’s reliance on corporate tax receipts.  

All eyes will be on Minister for Finance Paschal Donohoe ahead of Budget Day on 27th September 2023. With respect to income tax, while the ‘benefits’ could reach up to two million taxpayers, it is difficult to foresee the real and tangible differences these recommendations could offer to the typical Irish taxpayer. With inflation sitting at 9.1% in July and expected to increase, the prospect of a recession and rising interest rates, it remains to be seen whether these measures go far enough to alleviate the burden on the taxpayer.