The five key measures we expect to see for Financial Services in Budget 2022
- One of the key features anticipated in Budget 2022 will be the introduction of Interest Limitation Rules (ILR) into Irish legislation from 1 January 2022. From an FS perspective, this may have a significant impact on parts of the industry as the ability to avail of a tax deduction on interest payments is restricted. We welcome the extensive consultation on this matter between the Department of Finance and key stakeholders which PwC has been heavily involved in. We are confident that this will lead to considered and pragmatic legislative reform.
- Ireland is also expected to introduce reverse hybrid mismatch rules under the EU’s Anti-Tax Avoidance Directive (“ATAD”). These rules contain a number of complexities that will require careful transposition into domestic law to ensure the rules achieve their policy goals without any unintended consequences. Please see our response to the recent consultation here.
- The Environmental, Social and Governance (ESG) agenda continues to gain momentum globally as investors increasingly focus on sustainable finance and investments. Positive measures in this space would be welcomed by the FS sector. Read further on our climate action insight here.
- Ireland was the first country to undertake a consultation in relation to the OECD international tax proposals, which was well received. The implementation of Pillar 2 of these proposals, and the ongoing US tax reform proposals will be important for certain parts of the FS sector. Ireland’s ability to react quickly and practically to such changes in the global tax landscape will be paramount. For more information see here.
- Ireland's commitment to running a public consultation on the possible implementation of a territorial tax regime will be broadly welcomed by the FS sector. The upcoming consultations in respect of outbound payments and the wider withholding tax regime will also be monitored closely.
Key legislative developments
The introduction of the ILR will have a significant impact on parts of the FS industry as the ability to avail of a tax deduction on interest payments is restricted. Widely anticipated, and flagged in Budget 2021, these rules seek to limit deductions by reference to ‘net borrowing costs’. The Department of Finance has undertaken extensive consultation with industry bodies to ensure that the rules are introduced in a manner that will maintain Ireland’s global competitiveness, while balancing the need to achieve the minimum standard set out in ATAD I.
We expect to see the introduction of legislation focused on reverse hybrid mismatch rules in Ireland effective from 1 January 2022. A careful implementation of these rules is particularly important given the recent upgrade of Ireland’s Investment Limited Partnership (ILP) regime and the importance of the Irish Common Contractual Fund as an investment product. We encourage the Minister to take a surgical approach to such amendments thereby ensuring Ireland’s tax transparent investment products remain competitive.
Ireland’s policy roadmap
There has been significant focus on developing Ireland’s reputation as a global “green” investment hub. The FS sector in Ireland has a key role to play and can do so in a manner which enhances Ireland’s sustainability credentials while simultaneously facilitating economic growth. Ireland has repeatedly demonstrated its ability to be innovative in terms of signalling it is ‘open for business’ and we believe that Budget 2022 is an excellent opportunity for Ireland to continue this focus on the ESG agenda.
Post-COVID-19, Budget 2022 offers a clear opportunity to ‘build back greener’. We would welcome the introduction of legislation that promotes Ireland as a centre for global ESG investment, and also promotes the adoption of sustainable practices by Irish companies. Ireland’s tax efficient investment fund regime provides an excellent platform and further legislative amendments will ensure that the holding of ESG assets through Irish structures is not prohibitive, when compared with other competitor fund domiciles. In addition it is important that Ireland can attract the right people. Attracting and retaining local and international senior people with the requisite experience and skills is a necessary step in developing Ireland as a location for ESG investment funds. A new form of tax relief designed to incentivise senior employees of fund managers to locate in Ireland would therefore be welcome.
The OECD continues its efforts to reform the international tax system. It is addressing taxation challenges arising from the digitalisation of the economy and remaining concerns around base erosion and profit shifting. Ireland has recently concluded a welcomed public consultation and we expect Budget 2022 to reference the roadmap towards Ireland’s continued engagement on Pillar 1 and Pillar 2.
The implementation of Pillar 2 will be particularly important for the FS industry. If legislation does not take into account the specifics of the industry, and the strict regulatory rules in which it operates, it could lead to instances of taxation well in excess of the minimum rate. The exclusion by the OECD of regulated FS vehicles from Pillar 1 is welcome and will allow Ireland to remain competitive as a global hub for the sector.
The tax strategy group papers indicated a renewed focus on ensuring Ireland’s tax system remains competitive and fit for purpose. A number of the proposed consultations over the coming months will help shape many key aspects of the Irish corporation tax regime for years to come. The commitment by the Department of Finance to run a public consultation on the possible implementation of a territorial tax regime is welcomed. Particularly given the current complexity of Ireland’s double tax credit system which can be quite difficult to implement across the FS industry. A territorial tax system could further enhance the attractiveness of Ireland's existing holding company regime for institutional investors. It would be an important development when coupled with the recent enhancements of the ILP regime. We would encourage the Department of Finance to look to other financial services hubs and their holding company regimes, particularly in areas such as their capital gains tax participation exemption.
Linked to the above, the consultation in respect of outbound payments and the wider withholding tax regime, and the upcoming consultation in respect of the additional defensive measures for countries on the EU list of non-cooperative jurisdictions, are eagerly awaited. We encourage all FS stakeholders to proactively engage in these consultations.
There has been much legislative reform over the past number of years as a result of OECD & EU developments. In some cases the new legislation has been difficult to integrate with historic pieces of legislation. Often it has resulted in certain sections becoming redundant. We encourage a process of evaluating many areas of our tax code with a view to simplifying the legislation.
Post COVID-19 recovery
The FS sector can contribute to Ireland’s post-COVID-19 recovery. In particular, opening up the wider commercial sector to increased investment from abroad will provide much needed financing. There are many measures that could improve the ease of investing in Ireland.
The adverse impact of COVID-19 has been felt across the full range of FS activities. Arguably the aircraft leasing sector has been the most significantly impacted. Technical changes have been sought around the extension of the stamp duty exemption that currently applies to the transfer of aircraft. This would be a welcome boost for the sector as it seeks to recover, with the potential for further activity in the trading market as we emerge from the pandemic.
The bank levy, introduced in 2014, is currently due to expire at the end of 2021. While the changing shape of the Irish banking sector and other factors may drive the need for some reform of the levy, we would expect this to require extensive consultation. In this year’s Budget, we would expect the levy in its current form to be extended further.
We hope to see the Employment Investment Incentive Scheme (EIIS) opened up to allow investment vehicles, such as private equity partnerships, to qualify for tax relief under this scheme. The EIIS currently provides for income tax relief of up to 40% for investments made by individual investors (investing directly, or through a designated investment fund) in unquoted micro, small and medium sized trading companies. Increasing the range of collective investment structures which can access EIIS tax relief would generate increased funding for SMEs facing liquidity challenges. It would be a welcome boost as many seek to recover from COVID-19.
The FS industry has long called for a refinement of Ireland’s ‘safe harbour regime’ in the context of foreign investment funds utilising the services of domestic investment/asset managers. Given the increasingly mobile nature of the workforce and COVID-19 travel restrictions changing working patterns, this small refinement would further boost the attractiveness of Ireland as a location for asset managers to set up corporate substance.
In general, Irish domestic life policies/funds are subject to an exit tax of 41% on payment to individuals. Regulated funds located in the EU/EEA/DTA jurisdictions are also subject to tax at 41% on income or gains made by individuals. Individuals in receipt of income from an offshore fund are generally subject to tax at 41% income tax plus PRSI and USC. Over the last five years, the rate of DIRT has reduced from 41% to 33% with no corresponding reduction to exit tax on life policies/fund investments. This 8% differential in the tax treatment of saving products seems unjustifiable. It is a good time to correct this anomaly given the need for consumer spending.
We are here to help you
The evolving tax policy landscape is one which FS businesses need to continuously monitor. There is no doubt that the weeks and months ahead are a crucial time in the tax policy calendar. We are ready to help you navigate these changes in a robust and sustainable way. Contact us today.