Personal tax reform Personal tax reform Personal tax reform

• Personal tax reform is needed to attract and retain highly skilled and talented people to work in FDI, Irish global businesses and SME sector
• Tax policy can play meaningful role in addressing housing crisis and furthering the climate change agenda
• Opportunity for Ireland to become global leader in R&D activity
• An Office of Tax Simplification and improvements in taxpayers’ rights will make the tax system more attractive

KPMG is calling for income tax and PRSI reform, and a rate reduction in CGT to offset challenges from global tax reform, Brexit, digitisation and remote working.  In its submission to the Commission on Taxation and Welfare, KPMG also highlighted how the R&D regime can be enhanced to make Ireland a global R&D leader.  The submission sets out the role of tax incentives in addressing issues critical to Ireland’s ability to compete internationally, which include the supply of housing and climate change. 

KPMG highlights that income tax and PRSI paid by middle- and high-income earners in Ireland is high by international standards and that the Irish Exchequer is highly dependent on tax receipts from a relatively small number of individuals. Figures from the Department of Finance indicate that receipts from income tax and USC account for approximately 39% of total tax receipts in 2021, with the top 25% of income earners projected to pay 83% of the total income tax and USC in 2021.

In its submission, KPMG outlines that international tax reform puts even more pressure on small countries like Ireland to have senior multinational executives and value adding roles located here to demonstrate ‘substance’.  It is crucial that Ireland retains ‘substance’ to support profits allocated here for corporation tax purposes. Locating senior executives in Ireland typically also generates greater employment opportunities in Irish organisations.  Under the new BEPS 2.0 minimum tax rate rules, there is also an additional benefit to having high value employments located in Ireland. To address this, and risks stemming from cross-border remote working opportunities, Ireland must be able to attract and retain key talent. The personal tax regime and the tax cost to employers of locating staff are critical factors in determining where key talent and substantial businesses are located.

KPMG recommends that a long-term view is taken focused on attracting and retaining FDI and supporting domestic entrepreneurship, with reform of the taxation system aimed at reducing the marginal cost of employment in Ireland for both businesses and individuals.

Specific measures proposed are:

• The overall marginal rate of tax (including PRSI) in Ireland is set at a level attractive to highly skilled and mobile labour.
• The capping of PRSI contributions by employers, employees and self-employed.

Reducing the marginal rate of income tax and capping PRSI are also crucial factors for Irish SMEs seeking to attract and retain workers with the required skills to grow and scale their business. 

KPMG is calling for a reduction in Capital Gains Tax (CGT).  KPMG believes a reduction in CGT could promote stronger economic activity and greater Exchequer receipts.

The global R&D tax credit regime will become increasingly competitive, as new rules under Pillar Two of BEPS 2.0 will treat certain refundable tax credits, grants and subsidies as income for the purposes of calculating effective tax rates.  KPMG believes Ireland’s R&D regime must be best in class, offer a strong incentive to businesses to establish substantial operations here involving a highly skilled workforce, and be more attractive than competitor economies to address the inherent disadvantage Ireland faces as a smaller economy.

KPMG also believes the R&D regime can be used to strategically target specific industries or industry segments where Ireland wants to develop deep competencies and manufacturing capabilities; e.g  green technologies, where Ireland could enhance its reputation as a global centre of excellence for research and innovation.

KPMG considers the cost and ease of tax administration as being a differentiator between jurisdictions and recommends the establishment of an Office of Tax Simplification to advise on how to reduce the complexity and improve the efficiency of the system for Revenue and taxpayers.  

KPMG’s submission highlights the role of tax policy as a tool to promote sustainable behaviour from consumers and business alike, and recommends a number of actions such as:

• Mobilising private finance for green investment e.g. the introduction of an exemption from tax on interest earned by individuals on “green” bonds
• Incentivising the development and use of green technology
• Support for sustainable buildings

KPMG identifies a number of tax changes that could assist in addressing the housing crisis, which will not only enhance Ireland’s attractiveness as a location for investment but will also achieve the desired societal benefits for people living here.

Amongst the measures KPMG is calling for are:

• A temporary removal of the VAT cost on new houses to bring more affordable supply to the market. KPMG recommends the implementation of a temporary scheme allowing a rebate of VAT to certain persons on the purchase of new houses. This could preserve the VAT regime for the suppliers of housing but allow a market intervention for purchasers which could have a dramatic impact on affordability and take-up.
• The lowest possible rate of VAT on supplies of new residential housing should be introduced at the earliest opportunity. In this regard, the existing 9% rate is a possible benchmark, though a lower rate is recommended.

Commenting on the submission, Tom Woods, Head of Tax, KPMG in Ireland said: “We believe that the work of the Commission arrives at an opportune time, as Ireland and the world experience significant changes to the global tax landscape, accelerated digitalisation of the economy, climate change and the increasing importance of retaining and attracting talented and skilled people. Given this changing environment Ireland needs to build on the vision and courage it has shown in the past to adapt to the challenges we face and those that lie ahead over the next 10-15 years so we can remain successful into the future. The work of the Commission will play a crucial role in informing and shaping the changes we make to our tax system. These changes will have major implications for Irish society and the Irish economy.”

KPMG has also called for:

• improvements in areas dealing with taxpayer rights,
• the introduction of a dynamic modelling system to evaluate the full impact of changes to the tax system,
• a reduction in stamp duty on shares, and
• index linking of credits, reliefs and base costs for tax purposes so that taxpayers are protected from the effects of inflation.