BEPS 2.0 – Pillar Two minimum tax
As expected, the Minister for Finance has confirmed that legislation to implement the 15% minimum tax rate under the OECD’s Pillar Two agreement will be published in the Finance Bill next week.
Under the BEPS 2.0 initiative, the OECD has formulated rules (known as ‘Pillar Two’) designed to implement a global minimum effective tax rate (ETR) of 15% on a jurisdictional basis, in respect of multinational groups with annual turnover exceeding €750 million in two of the last four years. Under these rules, the ETR for a jurisdiction is to be determined by reference to the financial accounting profits and tax expense (with some adjustments) derived from the financial statements of the multinational group.
These rules are expected to come into force for accounting periods beginning on or after 31 December 2023 and could see additional tax paid in Ireland in respect of Irish companies and, potentially, foreign subsidiaries in the case of certain multinational groups.
In an EU context, the Pillar Two rules were set out in the EU’s Minimum Tax Directive in December 2022. The legislation required to transpose the provisions of the EU Directive and implement the Pillar two rules in Ireland will be set out in the Finance Bill. The Government had previously published proposed legislation for commentary by stakeholders under two separate feedback statements in February and July 2023 respectively.
Pillar Two will represent some of the most complex tax legislation introduced in Ireland in living memory and as noted by the minister, represents a once in a generation reform to Ireland’s corporation tax system.
For completeness the Pillar One proposals, which seek to reallocate taxing rights to market jurisdictions, have not yet been finalised and will not form part of the Finance Bill.
Territorial tax regime and simplification
The Minister for Finance has indicated his intention to simplify aspects of Ireland’s business tax regime.
Following a public consultation process, the minister confirmed that a participation exemption for foreign sourced dividends will be legislated for next year, in Finance Bill 2024, with the detailed development work to take place over the coming months. This will be a significant first step in reducing the administrative burden on businesses.
However, we would have welcomed the implementation of such a regime in tandem with the introduction of the global minimum effective tax rate under the OECD Pillar Two rules in Finance Bill 2023. We are hopeful that the recommendations included in our response to the public consultation will, in due course, be reflected in the legislation giving effect to the relief.
Ireland’s tax regime for interest deductibility is highly complex. The minister has acknowledged this and has committed to engaging with stakeholders on the issue over the period ahead.
The minister also indicated that Revenue will, in the coming weeks, establish a dedicated Tax Administration Liaison Committee (TALC) subgroup focused on identifying any opportunities to simplify and modernise the administration of business supports. The terms of reference of this subgroup will be agreed at TALC and a report on the recommendations of the subgroup will be delivered during the course of 2024.
Research and Development Tax Credit
Two important enhancements to the Research and Development Tax Credit (RDTC) were announced by the Minister for Finance as part of the Budget.
The first is an increase in the rate of the RDTC from 25% to 30% in respect of 2024 expenditure. This increased rate would be available for all claimants, regardless of company size. This change will maintain the net value of the existing credit for companies subject to the new 15% minimum effective tax rate resulting from BEPs Pillar two. It will also deliver a substantial benefit to SMEs and those companies outside the remit of Pillar Two.
The second enhancement is a doubling of the amount of the RDTC available to be refunded to a company as part of its first year RDTC instalment. This has increased from €25,000 to €50,000. This change is designed to provide quicker access to funding from the RDTC for companies engaged in smaller R&D projects.
Retirement relief
Retirement relief provides relief to individuals from CGT on the disposal of businesses, subject to meeting certain conditions. The relief applies to disposals of qualifying assets after the age of 55.
The Minister announced two changes to retirement relief, effective from 1 January 2025 which are:
- The maximum age at which the higher level of relief can be claimed will be increased from 66 to 70. This is a welcome change reflecting the pattern of increased longevity of individuals in business.
- Further, there will be a new limit of €10 million on the relief available for disposals to a child up until the age of 70. We await draft legislation in the Finance Bill to clarify the position for disposals to a child after the age of 70.
Angel investors
The minister has announced the introduction of a new capital gains tax (CGT) relief to encourage ‘angel investment’ in innovative start-up companies. This relief will allow investors to benefit from a reduced rate of CGT of 16%, or 18% if through a partnership, on the disposal of qualifying investments. The gain to which this reduced CGT rate can apply is capped at 200% of the investment made (with the standard 33% CGT rate continuing to apply to gains above that level). This will also be subject to a total lifetime gains limit of €3 million.
The Budget documents provide high level detail on the relief, with the detailed legislation to follow in the Finance Bill. At a high level, the relief will be available on investments by individuals, for a period of at least 3 years, in innovative start-up companies which are, small or medium enterprises. The investment must be in the form of fully paid-up newly issued shares costing at least €10,000 and representing between 5% - 49% of the ordinary issued share capital of the company.
To diversify risk, it is common practice for angel investors to spread their capital allocation across a number of high-risk innovative companies by acquiring multiple small shareholdings. Where such shareholdings are less than 5%, relief will not be available. This may result in less uptake than is hoped unless an amendment is made to the required minimum shareholding.
Entrepreneur relief
The minister announced the publication of a cost benefit analysis with respect to an Entrepreneur relief. This relief applies a 10% CGT rate to lifetime gains of up to €1 million realised by shareholders on the disposal of investments in certain companies subject to meeting qualifying conditions including minimum shareholding and working hours.
The report concludes there is a relatively small net annual economic benefit arising from the relief but cautions the impact on the exchequer of any modification to the relief. In a welcome statement, the minister noted that his department will review this report to identify opportunities to refocus the relief in order to further improve the incentives available for entrepreneurs in innovative start-ups and to contribute to employment creation.
Employment investment incentive (EII)
EII provides income tax relief for equity investments in small and medium enterprises where qualifying conditions are met.
The existing rules apply different investment periods of up to 7 years and lifetime limits depending on the date of investment.
The minister announced that the EII scheme is being enhanced by:
- Standardising the minimum investment period to four years for all investments, and
- Increasing the amount on which an investor can claim relief on such investments to €500,000.
These changes will be effective from 1 January 2024.
The Minister also announced a review of EII in early 2024 focusing on further simplification of the scheme while ensuring compliance with EU State Aid regulations.
Bank levy
The Budget includes provision for the introduction of a revised bank levy for 2024. This follows the Department of Finance’s public consultation on the future of the bank levy which ran earlier this year. The bank levy in its current form was due to expire at the end of 2023 following several extensions to the levy.
The revised bank levy will apply to banks which received financial assistance from the State during the banking crisis (AIB, EBS, Bank of Ireland and PTSB). The revised bank levy will have a revenue target of €200 million. The bank levy was originally designed to produce a fixed annual yield of €150 million, however as a result of the planned exit of Ulster Bank and KBC from the market only €87 million was raised from the levy in 2022 and 2023.
Further information is expected in due course on the calculation methodology which will be used to arrive at the estimated €200 million levy. The minister also outlined that he will review the revised bank levy again next year to ensure it remains appropriately calibrated.
Other financial services measures
Motor insurers insolvency compensation fund levy
The minister announced that the Motor Insurers Insolvency Compensation (MIIC) Fund levy will be reduced by 1 per cent for all motor insurance policies renewed from 1 January 2024. This reduction is expected to benefit up to 22 million policy holders.
The levy was originally introduced to allow the MIIC Fund to meet claims under Irish motor insurance policies where the motor insurance operator becomes insolvent.
Funds sector 2030 review
The Minister for Finance made reference to the review which is currently ongoing of the Irish funds sector. The aim of the review is to ensure that the funds sector in Ireland continues to remain resilient, future proofed and an example of international best practice.
A public consultation paper was issued in June 2023 and KPMG submitted a response to this consultation which addressed a number of topics, including the regulatory and supervisory framework which applies to the Irish funds sector and the impact of Ireland’s current taxation regime on investment activity in the funds sector.
As part of our submission, KPMG made several recommendations across a number of topics, including the simplification of the tax regime which applies to investment products and to ensure consistency of tax treatment. This should reduce the compliance burden for individual taxpayers.
KPMG also recommended the alignment of the taxation rates applicable to investment income to existing marginal income tax and capital gains tax rates, to treat income from investment products as a single source to allow tax relief for losses and to the extent a deduction at source mechanism is retained for certain investment products, that it should not be applied as a final tax.
The submission also addressed the taxation of property funds and Section 110 investment vehicles.
A draft report is due to issue to the minister in summer 2024, following which it is expected that the minister will consider whether any changes to the current taxation framework are appropriate.
Support for the audiovisual sector
The s481 Film Corporation Tax Credit is a corporation tax credit of 32% of the qualifying cost of qualifying films up to a cap of €70 million.
The Select Committee on Budgetary Oversight published a report on the credit earlier this year noting that similar film reliefs in other countries have no cap on qualifying expenditure. As a result, those locations may be more attractive to larger film productions than Ireland. The report recommended a review of the cap and, in a positive move, the minister has announced an increase in the cap on qualifying expenditure associated with the credit from €70 million to €125 million.
The minister also plans to explore the creation of a new incentive for the unscripted production sector. This new incentive will require European Commission approval. Details on the proposed form of this incentive are not yet available.
Agri-business measures
During his Budget speech, the Minister for Finance acknowledged the continued importance of farming to rural communities in Ireland. With this in mind, the minister announced the continued extension of several important agricultural reliefs which were due to expire at the end of the year. These reliefs include:
Consanguinity (stamp duty) relief
Consanguinity (stamp duty) relief is designed to facilitate and encourage intergenerational farm transfers. It reduces the rate of stamp duty applicable to intra-familial transfers of farmland from 7.5% to 1% where certain conditions are met. Following a review, this stamp duty relief is being extended to 31 December 2028.
Young trained farmers and succession farm partnerships
Stock relief for young trained farmers, relief for succession farm partnerships and young trained farmers stamp duty relief are being amended to increase the aggregate lifetime limit available to a person under these reliefs from €70,000 to €100,000 from 1 January 2024.
Stock relief (registered farm partnerships)
Stock relief reduces taxable farm profits by reference to the increase in value of farm trading stock over an accounting period. The amount of stock relief which may be claimed by a partner in a registered farm partnership is subject to an aggregate cap over three years.
Stock relief for registered farm partnerships is being amended to increase the threshold from €15,000 to €20,000 in the case of qualifying periods commencing on or after 1 January 2024.
Leasing farmland
Finally, the minister indicated a change to the relief from tax which is available for individuals in respect of certain income from the leasing of farmland. The relief will be amended so that it only becomes available when the land has been owned by the lessor for seven years.
It would appear that this change is intended to better target the relief at farmers as distinct from investors. Currently, no ownership period condition exists for the relief to apply.
Digitisation of VAT
The minister announced that the Revenue will shortly launch a public consultation on how we can use digital advances to modernise Ireland’s VAT Invoicing and Reporting System.
The digitisation of VAT is expected to be introduced over the coming years in conjunction with EU tax digitisation measures. Taxpayers are likely to be required to upgrade their invoicing systems to enable both the receipt and submission of digital e-invoices.
In addition, similar to PAYE Modernisation, it is expected that this will result in taxpayers providing real time transactional information to the Revenue.
Compliance measures
The budget documents confirm that the Revenue will conduct a range of targeted compliance activities with a view to yielding additional taxes of €120 million. In 2024, it is expected that additional exchequer receipts will arise from increased compliance activities by the Revenue in the areas of eCommerce, payroll and expense reporting and the cash/shadow economy.
The approach in 2024 is likely to be consistent with the long-term trend of the Revenue relying on data, analytics and real time reporting to focus their audit and compliance activities on areas with the highest yield.
Queries? Get in touch
The measures announced in Budget 2024 will affect businesses and individuals across Ireland. If you have any queries on the impact of these changes for your business, please contact our Business Tax team below.
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