The 2018 Budget was in line with my expectations. Although it was light in terms of immediate provisions of relevance to the Financial Services sector, it announced the launch of a consultation process as part of the "Update on the International Tax Strategy" that will be important for the future of the sector.
Although not included in the Minister’s speech, we may see some fine tuning legislative measures in the upcoming Finance Bill, which would be welcome. There is a growing list of minor legislative updates that the Financial Services sector is calling for.
The launch of consultation as part of the Update on the International Tax Strategy will be important for the future of the sector.
The lack of change in today’s Budget is notable. Once again, it has been reinforced that the Irish corporate tax regime is stable and reliable for the Financial Services sector, and this stability will remain. The strong endorsement of the Irish corporate tax code and the 12.5% rate was also an important and very positive message to send to the international market.
That said, the announced consultation process will mean a busy 12 months for the Financial Services sector and engagement will be crucial. The consultation process will relate to the EU mandated measures that Ireland must adopt by 1 January 2019. It is vital that this reform is considered in a measured and thorough manner.
Ireland has managed tax reform to date efficiently and effectively. In 2017, this was demonstrated with the approach taken to the BEPS multi-lateral instrument, which was appropriate and measured. I believe this was partly due to the Financial Services sector’s engagement with Government to ensure that the implications for the sector were clear.
The sector has a responsibility to consider the implications of the upcoming reform and to engage in the consultation process announced. With the EU-mandated reforms and potential tax treaty negotiations on the horizon, along with ensuring that Ireland is "Brexit ready", it is clear that the next 12 months could shape the Financial Services sector in Ireland for decades to come.
When I think about reform and consultation processes, some immediate thoughts come to mind. At the forefront is the potential for unintended consequences of reform. In many cases, the Financial Services sector is not specifically being targeted by recommended reform.
Nonetheless, that does not mean it is immune from the impact and in many cases, it is quite the opposite. Looking ahead, hybrid mismatch reform has the potential to have considerable impact. Areas such as US ‘check-the-box’ elections also need to be carefully considered. We can learn lessons from the UK, where the Financial Services sector is grappling with the impact of domestic hybrid mismatch reform introduced last year.
Secondly, we should take time to consider what is being asked of the Financial Services sector regarding upcoming reform.
For example, when introducing a Controlled Foreign Company (CFC) regime, should the Government consider moving to a territorial tax system? The UK has a CFC regime with a dividend and optional branch exemption. While this appears to be an attractive option for Ireland to consider, our experience is that the uptake on the branch exemption in the UK is actually quite low.
Branches are prevalent in the Financial Services sector, particularly in the insurance space. They are increasingly appearing in the asset management sector due to the potential set-up of Irish MiFID firms as a result of Brexit. The commercial impact of any such proposed changes needs to be proactively considered by the Financial Services community.
Overall, the 2018 Budget was uneventful in its immediate impact on the Financial Services sector but it signaled the start of a very important consultation phase. I would ask the sector to embrace proactive engagement over the coming year. That will help shape the introduction in Ireland of many significant changes to our corporate tax regime.
The year ahead could shape the future of the Irish Financial Services sector, with Brexit and reform on the agenda.