Some observers view this year as being one of the most difficult budgets of the cycle since the global financial crisis erupted. When you have nothing to give out, the argument goes, you can say no to everyone. Yesterday, Minister for Finance Michael Noonan faced a "problem" that had not been faced in seven prior budgets – he had a small bit of wriggle room and lots of stakeholders were putting forward their cases.
On the personal tax side, he had to weigh up the economic consequences of tax cuts, the psychological impact of offering some benefit to hard- pressed taxpayers and the political calculus of an election that is starting to appear on the horizon. On the corporate tax side, he had to try and repair some of the international reputational damage done in recent times, calm the nerves of existing multinationals and have a few “polished up” new incentives for indigenous businesses and the foreign direct investment sector.
Remarkably, he seems to have addressed most of his major objectives. The changes announced to the corporate residence rules demonstrate Ireland’s commitment to ensuring its taxation system is globally accepted as an open, transparent, rules-based system which is fair and, most importantly, competitive.
Criticism
Ireland has suffered a lot of unfair criticism internationally around these rules, much of which typically ignores the fact these companies are ultimately headquartered elsewhere.
In any event, having regard to the dictum that "when you're explaining, you're losing", the Minister has decided to change these rules, ensuring the "double Irish" will be no more for new entrants after January 1st, 2015. This change has been well flagged by the Department of Finance in recent months and there has been extensive consultation to ensure the FDI community understands its context.
The proposed transition period of six years will provide affected multinational groups time and flexibility to restructure their global arrangements in a considered manner, particularly important given the uncertainties on how BEPS will impact the tax law of other countries in which they operate.
Against this backdrop, the proposed “knowledge development box” and other improvements announced to our research and development and intellectual property offering should further encourage the location of IP in Ireland.
The Minister’s stated intention to make this “best in class and at a low competitive and sustainable tax rate” will be crucial for Ireland in an environment where many countries have attractive “innovation box” offerings.
Since 2009, taxpayers have experienced significant cuts to their disposable income with the introduction of the income levy and later universal social charge (USC) and more recent introduction of local property tax and water charges.
The adjustments to USC and tax bands and the decrease in the top rate of tax announced as part of a three-year strategy provide welcome relief for taxpayers with, at last, an easing of their personal tax burden. The moves signalled to reduce local property tax rates from 2015 and to provide credits for water charges provide further good news.
Turning point
So, are we there yet? What we can say is that we are at a turning point where the painful tax and spending cuts of previous years are no longer necessary and there is scope to provide a small stimulus package to assist the economy. This package appears to be well-targeted, aimed at keeping the economy on a sustainable path to recovery and stimulating economic activities in the areas most in need of growth.
Opinion polls have shown that, while there is broad agreement that the economy is in recovery, individuals have not expressed the same sentiment personally. The personal tax measures announced as part of the three- year plan should give confidence that this is a real change in direction for them.
The corporate tax measures too should reaffirm Ireland’s competitiveness and that we continue to be “open for business”. Feargal O’Rourke is head of tax services at PwC @feargalorourke
