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What will Budget 2022 mean for Corporate Tax and FDI?

05 October, 2021

The current international tax reform proposals represent the biggest shift in the international tax policy landscape in a century. The stance taken by the Minister for Finance in the Budget 2022 speech will be of paramount importance. It will lay  the foundations for Ireland’s response to the proposed global developments. From the OECD’s BEPS 2.0 proposals to US tax reform, the coming months and years could see a near-total rewriting of international corporate tax rules. These measures have the potential to reduce the attractiveness of small, open economies like Ireland who use corporate tax as one legitimate lever to attract foreign direct investment (FDI).

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The key measures we expect in Budget 2022 include: 

  • Ratio based Interest Limitation Rules ("ILR") being transposed into Irish tax law for the first time with effect from 1 January 2022.
  • The introduction of the reverse hybrid mismatch rules, ultimately requiring the imposition of a tax charge on an entity which, by definition, was not previously seen as a taxable entity in Irish law.
  • We hope that the Minister will signal Ireland’s continued offering of a 12.5% corporate tax rate for trading profits for as many taxpayers as possible into the future. 
  • Further strengthening of our corporate tax regime and FDI offering, for example, improving our research and development offerings (R&D) and policies to promote investment in areas such as the renewables sector. 

It is crucial that appropriate actions are taken by the government to ensure that Ireland remains agile, nimble and collaborative. In responding to global tax policy developments, we must ensure that a focus is maintained on our own key tax policies. Budget 2022 presents an opportunity to address and tackle ongoing domestic issues, such as; 

  • the need to raise tax revenues to pay for COVID-19 related debt
  • dealing with societal issues such as the housing crisis and health system
  • our climate change commitments and 
  • ensuring Ireland is equipped for a more digital future.

Some expected changes in Budget 2022 have been signalled in advance by the Department of Finance and have been the subject of public consultation and feedback initiatives. These include the transposition of the EU’s Anti-Tax Avoidance Directive (ATAD) measures on Interest Limitation Rules and Reverse Hybrid Mismatch Rules. 

Interest Limitation Rules

Notably, Budget 2022 will see the introduction of ratio based Interest Limitation Rules (ILR) being transposed into Irish tax law for the first time with effect from 1 January 2022. This change is required for Ireland to fully transpose ATAD. At a very high level, the ILR seeks to restrict tax-deductible interest expenses to 30% of EBITDA in a given period. 

The Department of Finance has sought stakeholder engagement with feedback statements on the matter issued in November 2018, December 2020 and July 2021 and significant engagement has taken place throughout this period. The complexity of layering the ATAD provisions on top of what are already complex existing Irish rules has been acknowledged by the Department of Finance. A key ask is that the new rules are brought in with the least administrative burden on taxpayers and for ongoing active review of all of the existing interest rules with a view to consolidation and simplification in the coming years.

Reverse Hybrid Mismatch Rules 

2020 saw the introduction of the anti-hybrid rules into Irish law. They are aimed at arrangements that exploit differences in the tax treatment of a financial instrument or entity under the laws of two or more jurisdictions to generate a tax advantage. As mandated by ATAD II, Ireland is required to implement its rules with respect to reverse hybrid mismatches by 1 January 2022. A reverse hybrid mismatch arises where an entity, referred to as a reverse hybrid entity, is treated as tax transparent in the territory in which it is established but is treated as a separate taxable person by some, or all, of its investors such that some, or all, of its income goes untaxed. A feedback statement has been underway in recent months, with the rules set to be published in Finance Bill 2021. Read more on this measure here

Setting the Key Tax Policy Objectives

Ireland’s tax policy objectives should aim to promote foreign direct investment and growth in the domestic economy. In light of the unknowns that we will face post BEPS 2.0 and US Tax Reform, we believe that a simplification of the corporate tax system is necessary. An agile and nimble approach to tax policy is crucial to maintain our competitiveness in the ever changing tax environment. We would welcome the following in Budget 2022:   

  • Continued commitment to retain the 12.5% corporate tax rate for the vast majority of taxpayers. We believe that the approach adopted by the Department of Finance to date, in refraining from making any decisions on our tax rate until the international picture becomes clearer, is the correct approach. 
  • Tax policies to support Ireland's growing businesses to ensure that they are positioned for success in a post COVID-19 economy. For example, we welcome measures such as the proposed tax credit for the digital gaming sector which would support quality employment in creative and digital arts in Ireland.
  • Tax policies to support Ireland’s plan to transition to a low carbon, climate resilient and sustainable economy. Policies should further promote investment in areas such as the renewables sector.
  • Leverage the ground gained in promoting the financial services sector post-Brexit to compete for additional investment and opportunities. 
  • Improve our research and development (R&D) offerings and ecosystem to ensure sustainable economic growth. It is more important than ever that we focus on improving our R&D and innovation tax incentives and the administration of these to make us world leaders in industries such as technology development, digital gaming, renewables, biotechnology, and pharmaceuticals.
  • Improve our research and development (R&D) offerings and ecosystem to ensure sustainable economic growth. It is more important than ever that we focus on improving our R&D and innovation tax incentives and the administration of these to make us world leaders in industries such as technology development, digital gaming, renewables, biotechnology, and pharmaceuticals.

Outstanding Items from Ireland’s Corporation Tax Roadmap

Several 2021 public consultations were alluded to by the Department of Finance in the Corporation Tax Roadmap which was updated in January 2021. We expect to see the following later in the year:

  • A public consultation on the participation exemption/territorial regime.
  • A consultation on additional defensive measures in respect of countries on the EU list of non-cooperative jurisdictions (‘blacklist’ and ‘grey list’).
  • Finally, a consultation in respect of outbound payments and withholding taxes. The issues surrounding outbound payments have largely been remedied by US tax reform. However, a consultation on the issue would provide an opportunity to consider whether further action by Ireland may be necessary or appropriate.

We are here to help you

The ongoing international tax developments coupled with the imminent changes to our domestic tax rules, will mean that taxpayers need to prepare for changes in Ireland’s corporate tax offering. PwC will be there at every step to help you figure out what this means for your business.

Contact us

Feargal O'Rourke

Managing Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6480

Susan Kilty

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6740

Peter Reilly

Tax policy leader, PwC Ireland (Republic of)

Tel: +353 1 792 6644

Liam Diamond

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6579

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