This article first appeared in the Irish Independent and is reproduced here with their kind permission.
As Ireland approaches our second budget since the onset of COVID-19, the time is nearly over for speculation on what shape the final product will take.
Ahead of the budget announcement on 12 October, we spoke to Tom Woods, Head of Tax for KPMG in Ireland. For more in-depth analysis to help form your understanding of this year’s budget, you can find KPMG’s dedicated budget coverage here.
When asked whether he expects to see many surprises, Tom said that the budget process we have in place is very important. This is especially true when considering the challenges that have been, and still are, faced by businesses across the country over the past 18 months.
“One of the developments over the last number of years has been the level of consultation in advance of the budget on legislative changes being considered. The relevant stakeholders get engaged in productive dialogue with the Department around any of these changes.
“These consultations exemplify the transparency, certainty and stability of the tax system. Businesses don’t like surprises, so a constructive process where things are well flagged, debated and understood is welcomed and allows businesses time to prepare. Ultimately it provides a more stable platform for long term investment” Tom said.
The impact of countless businesses across Ireland only now beginning to open up after such a long period of time is bound to be on many people’s minds. When Minister Paschal Donohoe announces the budget to the nation, there will likely be a need to put them at ease.
Tom Woods
Head of Tax
KPMG in Ireland
Exchequer receipts show positive momentum heading into 2022
Reasons to be optimistic
“Overall our economic outlook for next year is already showing a number of positive signs. Exchequer receipts are running at around €2.5 billion ahead of profile and Modified Domestic Demand is forecast to grow by 6.5pc in 2022.”
Coupling this with the fact that unemployment continues to drop, there are certainly reasons for the public to be more optimistic than they may have been at first. However, inflation is beginning to bite and making a full recovery will of course take time, but in many regards we are in a better position than we could have expected.
“Exchequer receipts in 2020 fell by only 3%, principally driven by lower VAT receipts due to the shutdown of much of the domestic economy. Considering what happened, it is a very strong performance. 2021 is shaping up well with exchequer receipts currently running €6.3bn ahead of last year” he said. “As the various COVID supports have cost over €40bn to date, it is critical that we have robust exchequer returns to support the additional debt.”
Multinationals
Attracting international businesses has been a key industrial policy long before COVID-19 and recent events have only strengthened that. The relatively strong position we currently find ourselves in is due to a great number of different factors, including the multinational sector.
“The importance of the multinational sector for Ireland really was brought home during the pandemic. Multinational companies (MNCs) are an integral part of the Irish economy and support a lot of the domestic sector. As well as employment, multinationals drive the bulk of our corporation tax receipts, which continue to grow each year” Tom said.
Protecting against domestic difficulties
MNCs provide a hedge against difficulties that can arise in the domestic market. Their tax contributions have proven so essential for Ireland to avoid what could have been potentially a much more extreme situation. Were it not for the number of large international businesses operating on our shores, one can’t help but wonder how much more of the burden would have fallen on the shoulders of the State and our ability to borrow in the international markets to support our emergence from this crisis.
“They account for not only 82% of our corporation tax receipts but also 32% of employment and 49% of employment taxes so while they don’t employ as many people as smaller businesses, the people that they do employ contribute proportionately more to exchequer receipts due to the higher salaries paid.
In fact, the highly progressive nature of the income tax system was highlighted during the pandemic in that notwithstanding the substantial increase in unemployment during the pandemic, income tax receipts fell by a mere 1% as employment levels held in the multinational sector and in some parts of our domestic economy.”
“We always knew that the contributions the multinational sector makes were very significant. They provide a strong backbone or platform for the economy; being able to help meet some of the challenges a pandemic can put in your way,” he added.
Corporation tax
On the subject of multinational businesses, one of the main sources of discussion alongside the upcoming budget is focused on corporation tax.
Ireland’s position on the Organisation for Economic Co-operation and Development (OECD) International Tax Proposals is currently being debated.
The proposal, referred to as “BEPS 2.0,” is structured using a framework of two separate pillars. Pillar One is the allocation of taxing rights to market jurisdictions, and Pillar Two relates to the global effective minimum tax rate.
Ireland had reserved its position on Pillar Two as a minimum rate of at least 15% would create uncertainty as to what the future tax rate might be and stability in our tax system is important for attracting international business.
“One of the attractions of Ireland is the certainty and stability of the tax system. Investment into Ireland can be made with a very good understanding of what the tax landscape is currently, and what it will most likely be for the medium to long term.
“The OECD discussions and negotiations are still ongoing. I believe that the rate will be fixed at 15pc. If that is the case I would expect Ireland to sign up and limit the application of this rate to only those very large companies within its scope, so over 90pc of Irish businesses would remain unaffected and stay within our current corporate tax regime,” he said. This would be a good outcome for Ireland and keep us competitive internationally.”
Get in touch
To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please contact Tom Woods, Head of Tax. We'd be delighted to hear from you.
