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PwC Tax Strategy Group Paper Review

17 September, 2021

The Tax Strategy Papers were published 16 September 2021. The Tax Strategy Group is chaired by the Department of Finance with membership comprising senior officials and political advisers. Papers on various tax policy changes are prepared annually, and these papers form their proposals ahead of Budget 2022. The Group is not a decision-making body and the papers produced are simply a list of options and issues to be considered in the Budgetary process. Our subject matter experts are working through the details of the TSG papers and have highlighted some of the key takeaways in advance of Budget 2022 below.

The full TSG papers are available on the Department website.

An aerial photo of a woman sitting at a desk looking at a laptop.

Income tax

Statistics

  • The income tax or USC yield has grown from 13.8bn to 25.4bn in the last 10 years;
  • 6% of income earners will pay 51% of the total IT or USC intake (those earning more than 100k);
  • 25% of income earners will pay 83% of the IT or USC intake (those earning more than 50k);
  • Those earning less than 50k represent 75% of the workforce and pay 17% of the IT or USC intake;

Anticipated tax measures in Budget 2022 include:

  • Indexation of tax bands and credits (inflation is estimated to be in the 1.5% to 3% range);
  • Earned income tax credit will finally be at the same level as the PAYE or Employee tax credit;
  • The government will look at whether it can reduce the 3% USC surcharge over a number of years;
  • The government will look at bolstering the Home Carer Credit;

The Report acknowledges the significant changes that are occurring in the pensions landscape, including:

  • The removal of the 15-year time limit for the transfer from an Occupational Pension Scheme to a PRSA;
  • Abolition of the Approved Minimum Retirement Fund;
  • The establishment of an Auto Enrolment pension scheme for all employers (depending on age and earnings criteria).

The Report reviews the 'Help to Buy' Scheme, which is due to expire at the end of 2021.

  • Permitting the scheme to expire may give rise to significant housing market disruption at a time when formal commitments may have been in place giving rise to an expectation of its continuation. 

The following possibilities are considered: 

  • Extension of the scheme in its current form for a further two years to avoid market disruption;
  • Extension of the scheme for a further two years in its original form (i.e., pre-July 2020 relief was capped at 5% of the value of the property pr €20,000); 
  • Extension of the scheme but phase it out over a number of years through tapering relief;
  • Whichever option is chosen, there is a requirement for the Scheme to be kept under close review so that it can be adapted to market needs or demands.

Tax arrangements for transborder workers

  • The Minister for Finance committed to undertaking a review of Trans Border Worker Relief in the context of the continued availability of the relief while working from home in the State but where an individual was employed by a company outside Ireland.
  • This was on foot of the concession introduced by Revenue following the COVID-19 restrictions imposed as a result of public health.
  • The request was to analyse whether the concessional treatment could be placed on a Statutory footing and broadened beyond the scope of the 2020 and 2021 tax years such that where an individual spent less than 183 days working in Ireland, they could still avail of the relief.
  • If the proposal were to be adopted, it would have introduced an inequity to those employees who could avail of a lower tax rate by having an employer located in a lower tax jurisdiction (such as the UK), when compared to those who could not avail of the relief;
  • It would have also had competition implications for Irish employers - by placing Northern Irish or UK employers in a more competitive position compared to Irish employers;
  • The TSG concluded that the suggestion was impractical from a legal, allocation of taxing rights and challenging from a policy perspective, taking into account the wider body of taxpayers. 

Tax arrangements for remote workers

  • The Programme for Government gave a commitment to support and facilitate remote working;
  • The rate of remote working increased from 20% to 32%;
  • The National Remote Work Strategy has asked the Tax Strategy Group to consider the current tax arrangements for both employers and employees in Budget 2022;
  • It was noted that many of the current tax practices are permitted by Revenue on an administrative basis only.
  • Employers can provide a per diem of €3.20 and also provide office equipment, directly pay for phone or broadband tax-free.
  • Currently employees can claim for a proportion of vouched light and heat and broadband.
  • Proposed measures include: 
    • Introduce a per-diem working from home tax relief
    • Bespoke tax credit for remote workers
    • Enhance the current tax arrangements
    • €50 increase to the PAYE and EITC
    • "Super" accelerated capital allowances

Climate action and tax, motor vehicles and Benefit in Kind

  • One of the key actions to meeting Ireland’s climate change targets are consumer behaviour modification through the tax system, targeting VRT (at point of sale), motor tax and vehicle benefit in kind.
  • The government is conscious that this change will result in a loss to the exchequer of €1.5 billion annually (i.e., fuel excise, VRT and motor tax) and must therefore be kept under review.
  • A new company car benefit in kind regime based on a vehicle's emissions will be implemented on 1 January 2023 with rates increasing from 30% to 37.5% for the highest polluting vehicles. Equally reductions in BIK are available for lower emitting vehicles (as low as 9%);
  • Van BIK will increase from 5% to 8%;
  • Phased elimination of the electric vehicle BIK exemption (due to expire in 2022) by extending the exemption but reducing the €50,000 value threshold over successive tax years (to be eliminated in 2026). Electric vehicles would then be subject to the same car BIK rates as other vehicles.
  • Consideration should be had to reducing the business mileage bands from five to four.

PRSI for self-employed

  • There is no reference to abolition of USC or amalgamating USC and PRSI
  • For employees, increase the weekly earnings threshold for access to social insurance coverage from €38 to €96.15 to bring this into line with the current threshold for self-employed individuals. Outcome: Fewer claimants for social welfare benefits - equity of treatment.
  • Increase the minimum standard flat rate voluntary contributor rate from €500 to €1,000 incrementally over the next 5 years to 2027. Outcome: Additional funding.
  • Reducing the employee PRSI threshold above which employees are liable to pay PRSI from €352 to €250 (bringing this in line with USC threshold of €13,000 p.a.). PRSI Credit mechanism could still apply. Outcome: This would bring more contributors into the PRSI ‘net’ and increase funding.
  • Incrementally increase the rate of self-employed PRSI to that of the employer PRSI rate (currently 11.05%). Remaining social welfare benefits would be incrementally extended to self-employed contributors as the rates increase. Outcome: Parity of benefits based on the individual’s rate of contribution albeit the rate for an individual will approximate that of an employer as opposed to an employee .
  • Phasing out the lower PRSI rates and increasing both the employer and employee rates over five years by 1.5% and 1.25% respectively - (i.e. to 12.55% and 5.5% over five years to 2027).

Corporate tax

  • CT receipts: Acknowledges CT receipts growing year on year (11.833bn in 2020) and attributes it to 
    • improved trading conditions, 
    • the exhaustion of historical losses from the recession; and 
    • positive currency fluctuations.
  • Volatility of CT Receipts: Acknowledges the concentration of CT receipts from a limited number of sectors and companies and the risk of potential volatility in receipts in light of international tax reform. The estimate of this impact is based on ongoing work being carried out by the Revenue Commissioners and could be in the range of €0.8 billion to €2 billion annually.
  • Reverse Hybrids: Confirms that Finance Bill 2021 will legislate for anti-reverse-hybrid 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. 
  • Interest Limitation Rules: Confirms that the ATAD Interest Limitation Rules will be introduced in Finance Bill 2021, will take effect from 1 January 2022 and that the existing rules will not change in the interim. The papers acknowledge the need to to fully integrate the two systems, to remove redundancies and simplify administration for both taxpayers and Revenue authorities.
  • Participation Exemption or Territorial Regime: Confirms that a participation exemption or territorial regime consultation will be launched in Q4 of 2021. Any policy response will need to take account of the ongoing OECD discussions. 
  • International Mutual Assistance Bill: Due to be published in Q3 2021. 
  • Consider additional defensive measures for countries on EU list of non-cooperative jurisdictions: Confirms that a public consultation in relation to additional defensive measures for countries on the EU list of non-cooperative jurisdictions will commence in Q3 2021. It indicates that the policy response will be in the form of a denial of tax deductions or imposition of withholding taxes where material payments are made from Ireland to listed jurisdictions.
  • Outbound Payments: A public consultation in respect of outbound payments and wider withholding tax regime will commence in Q3 2021. It is anticipated that any such measures would be introduced in Finance Act 2023, to apply from 1 January 2024.
  • Adopt the Authorised OECD Approach for transfer pricing of branches: Confirms that it will be introduced in Finance Bill 2021
  • DAC 7: Confirms that DAC 7 is agreed and on track for introduction in Finance Bill 2021 in order to ensure that Ireland is at the forefront of developing and implementing the latest standards for exchange of information among tax authorities.
  • New Tax Treaty Policy statement: Due Q1 2022. 
  • New stakeholder engagement framework: The paper confirms that a new domestic stakeholder engagement process to be introduced in early 2022.
  • The paper illustrates considerations around a number of domestic measures being considered:
    • Tax Credit for Digital Gaming Sector: A tax credit for the digital gaming sector is being considered to support quality employment in creative and digital arts in Ireland. The paper considers some of the key potential components of the credit, including minimum expenditure, a cap on eligible expenditure, the claims process etc.
    • Accelerated Capital Allowance scheme for Energy Efficient Equipment: Consideration is being given surrounding potential new approaches to supporting investment in energy efficient equipment, which would allow for better verification of energy savings resulting from the scheme, while also balancing the confidentiality of taxpayer information and the administrative burden for both claimants and Revenue or SEAI. 
    • Accelerated Capital Allowance scheme for Gas Vehicles and Refuelling Equipment: Consideration is also being given to the potential extension of this scheme and the potential inclusion of hydrogen powered vehicles and refuelling equipment.
  • S486C – Relief from tax for certain start-up companies: The paper indicates that a large proportion of claimants of the start-up relief have traditionally come from sectors particularly affected by public health restrictions, including the wholesale and retail trade, construction, and accommodation and food. The link of this relief to profits and employer’s PRSI greatly reduces the benefit of this relief for these businesses and the paper considers a further extension of the relief and potential adaptations to the relief in light of these problems. 

Tax Appeals Commission

  • A new four-tiered structure of Appeal Commissioners, split by case complexity, expanding on the existing system of Appeal Commissioners and Temporary Appeal Commissioners has been approved. A recruitment process aiming to identify and appoint four new ‘Tier 3’ Appeal Commissioners is now under way.
  • Case stated: The Tax Appeals Commission have found it difficult to meet the 90 day deadline to finalise a case stated where a taxpayer has appealed a determination of the TAC, as this timeline included getting input from both parties involved in the appeal. It has requested amendments to the legislation to allow the case stated to be completed in draft by the 90-day deadline, with a further 21 days to receive representations from each party and a further 21 days to complete and sign the case stated.
  • It has also requested amendments to the legislation to allow the Appeal Commissioner to refuse an application for a case stated to be drafted where it is not clearly stated in what respect a determination is erroneous in law.
  • Dismissal of an appeal – failure to comply with direction: The Tax Appeals Commission is seeking to redress the balance in respect of the powers of the Commissioners where Revenue fails to comply with a direction of the TAC. As it stands, the taxpayer can be penalised for failure to comply with directions by having the case dismissed. Dismissing the case would be effectively finding in favour of Revenue, so is not an appropriate remedy, where Revenue fails to comply with the directions. The TSG has been asked to consider this.

International and EU tax developments

  • BEPS 2.0: The paper provides a useful overview of the OECD's Pillar I and Pillar II proposals. The paper reiterates that whilst Ireland has been supportive of a Pillar One solution, there are reservations surrounding Pillar II, particularly about the proposal for a global minimum effective tax rate of ‘at least 15%’. Other items of concern noted in the papers are 
    • the percentage of residual profit which will be allocated to, and taxed in, market jurisdictions;
    • Co-existence with GILTI (as the current US Administration is attempting to reform GILTI); and 
    • Whether implementation is compatible with the fundamental freedoms of EU law.
  • Proposal to address misuse of shell companies: The paper highlights the EU Commission's intention to tackle the abusive use of shell entities, with a proposal for action anticipated by the end of 2021. The measures shall apply in the form of a denial of tax benefits where a company is deemed an abusive shell entity, and will further introduce monitoring and tax transparency requirements on the entity.

  • Publication of effective tax rates paid by large companies: The Commission has signalled it will bring forward a new proposal mandating the annual publication of the effective corporate tax rate of certain large multinational enterprises with operations in the EU, using the methodology agreed for the Pillar Two calculations. The intention is to have the effective corporate tax rate paid based on the proportion of profit made rather than on their ‘taxable profits’, which can be reduced through various means such as tax allowances.

  • DEBRA (Debt Equity Bias Reduction Allowance): The Commission has signalled an intention to launch a legislative proposal to address the debt-equity bias in corporate taxation, through the introduction of an allowance system for equity financing with the intention of contributing to the re-equitisation of financially vulnerable companies.The paper confirms that Ireland will engage in the Council negotiations of the proposal and seek to ensure that it is compatible with our current tax system.

  • BEFIT (Business in Europe: Framework for Income Taxation): The BEFIT proposals replace the existing proposal for a Common Consolidated Corporate Tax Base (CCCTB) and aims to provide a single corporate tax rulebook for the EU, based on a formulary apportionment and a common tax base. Whilst the details of the proposals remain unknown, the paper confirms that Ireland will continue to engage actively on the issue. 

  • DAC8 - Cryptocurrency: Acknowledges Ireland’s support for the exchange of information by tax authorities and its ongoing participation at EU Council level as the Directive on Administrative Cooperation is extended to keep pace with the technological developments and extend the scope of exchange of information to include areas such as crypto-assets and e-money.

  • Article 116 (Qualified Majority Voting): Acknowledges Ireland’s preference for the current unanimity based voting procedure despite the European Commission Fair and Simple Taxation Preference Action Plan’s to make full use of Article 116.

VAT

VAT rates

  • Ireland has the joint 4th highest standard rate of VAT in the EU, at 23% (the average standard rate in the EU being 21.5%). A 1% increase in the standard rate is projected to raise €442 million while a 1% decrease would cost the exchequer a similar amount.
  • Moving categories from zero or lower rates to higher rates or streamlining or consolidating the existing rates could also yield significant revenues however increasing VAT rates may negatively affect inflation (all rates), employment (13.5% rate), the less well-off (particularly where the categories qualifying for 0% and 13.5% rates are reduced). The potential impact on cross-border trade must also be considered while it is recommended that any reform of the zero rate should be undertaken in conjunction with similar changes in the UK or with compensatory expenditure measures for those less well off.

SME businesses

  • The cash receipts basis of accounting means the trader does not have to account for VAT until they have themselves been paid. Presently traders whose turnover does not exceed €2 million qualify. It is projected that an increase in this threshold to €2.5 million would benefit over 1,800 businesses and would have an upfront cashflow cost to the exchequer of €38 million.
  • Given the low level of inflation it isn't possible to increase the general turnover thresholds under which businesses are not required to register for VAT.

COVID-19-related measures

  • On 1 June 2021 the Government announced that the temporarily reduced VAT rate of 9% applying to the hospitality and tourism sectors was to be extended to 31 August 2022. The TSG group has concluded that a further extension of the 9% rate for the hospitality and tourism sectors may not be the most appropriate use of Exchequer funds

Charities – VAT Compensation Scheme

  • The VAT Compensation Scheme for Charities was introduced in Budget 2018 to reduce the tax burden on Charities and partially compensate them for the VAT incurred in delivering on their charitable purpose. Presently the total annual capped fund available is €5 million. For 2020 claims which were submitted between 1 January and 30 June 2021 totalled 729 with a total value claimed of €31,719,121. Claimants received about 16% of their claims in 2020. A review of the scheme was undertaken in 2021. The charities representatives consider that the scheme has had a positive impact on the sector and should be continued. However, they remain concerned at the size of the annual fund and the level of demand for funding. 

Housing

  • The VAT rate on construction services and on new houses is 13.5%. It is possible for Ireland to apply the 9% reduced VAT rate to the construction, repair and renovation of residential housing. Revenue estimated, in June 2021, that reducing the VAT rate on residential construction and repair and maintenance from 13.5% to 9% was likely to cost in the region of €600 million in 2022 (based on the assumption that 33,000 units are delivered in 2022). Applying different VAT rates based on geographical regions within the State is not permitted.

VAT Margin Scheme on used cars

  • The UK acted unilaterally to retain the UK VAT margin scheme for supplies of used cars from GB to NI despite the NI Protocol meaning such supplies are imports requiring import declarations and payment or accounting for full import VAT on the customs value of the cars. Pending resolution between the UK and EU, Ireland is temporarily charging VAT at 23% on the full value of a vehicle which has been imported into the State after 1 January 2021, either directly from GB or via Northern Ireland

Climate

Corporate tax

  • Accelerated Capital Allowance scheme for Energy Efficient Equipment: Consideration is being given surrounding potential new approaches to supporting investment in energy efficient equipment, which would allow for better verification of energy savings resulting from the scheme, while also balancing the confidentiality of taxpayer information and the administrative burden for both claimants and Revenue or SEAI. 
  • Accelerated Capital Allowance scheme for Gas Vehicles and Refuelling Equipment: Consideration is also being given to the potential extension of this scheme and the potential inclusion of hydrogen powered vehicles and refuelling equipment.

Energy taxes or excise

Mineral oil tax

References ways to reduce the diesel excise "gap" (diesel is 10.6c per litre cheaper than petrol encouraging purchase of diesel vehicles)

  • Gradual increases in diesel MOT each year to reach "equalisation" to reduce the negative effects of diesel vehicles 
  • Phasing out of the Diesel Rebate Scheme on auto-diesel for hauliers, passenger transporters through gradually: a) increasing price floor; b) reducing rebate rate; c) reducing rebate amount. 

Amended Energy Tax Directive (ETD)

The EU released a proposal to amend the current ETD. These proposals include:

  • Minimum rates will be based on energy efficiency rather than volume
  • Fossil fuel subsidies to be phased out
  • Scope increased to include new fuels (hydrogen, biofuels)

Government supports these moves but notes that systems changes will take time to be ready for new energy content calculations and notes specific challenges for Ireland re., removing certain subsidies particularly in aviation and maritime sectors given we are an island

National implications of Carbon Border Adjustment Mechanism

  • Introduction of a national authority to administer the CBAM scheme. Gradual introduction; initially applied to imports of cement, iron and steel, aluminium, fertilisers due to risk of carbon leakage
  • National impact assessment needed to understand implications of CBAM given Ireland's open economy (in particular for imports of electricity from GB)

Electricity tax

  • Ireland has one of the lowest rates in the EU
  • If fossil fuels are to be reduced, excise yield will reduce. If electricity tax is to cover this shortfall, it needs to be increased and reliefs (including for supply to households) removed. 

Carbon tax

  • Finance Act 2020 introduced annual carbon tax increases up to 2030. The 2022 increase will be €7.50 bringing the overall rate to €41 per tonne of carbon dioxide emission. The increase will apply from 13th October 2021 for petrol and diesel and from 1st May 2022 for all other fuels.

Motor vehicle taxes

Various options being considered to use motor vehicle taxes to reduce emissions:

  • Motor Tax: introduce an emission-based motor tax for LGVs

  • VRT: extending relief for electric vehicles (BEVs); introducing an emission-based system for commercial vehicles (banded system or discount lower-emission vans)

  • BIKs: BIK rates differing depending on vehicle emissions.

Excise

General excise

Alcohol Products Tax

  • Considering introducing an excise relief for craft cider (similar to that for craft beer)

  • Calls from drinks industry for a 7.5% reduction in high Irish APT levels in this budget (and further reductions subsequently) to support recovery of drinks and hospitality sector

Tobacco Products Tax

  • Option to increase Minimum Excise Duty (MED) to reduce consumption of cheapest cigarettes - but needs to be weighted against likelihood it will push people to purchase illicit cigarettes

  • At national level, Govt wishes to introduce taxation on new products (such as e-cigarettes smd novel tobacco products) but believes this is best done via an updated EU Directive and harmonised rates EU-wide (which are currently being reviewed at EU level)

  • Revenue concerned that TPT increases may lead to more use of non-state tobacco, illicit tobacco or prompt consumer moves to e-cigarettes thus neither increasing yield nor decreasing use

Betting duty

  • Considering a potential increase in betting duty of 0.25% but increase in relief from 50k to 65k (the relief will be of more benefit to smaller, independent bookmakers).

Brexit

General trade points

  • Emphasis on Ireland achieving its aims from Brexit via the Withdrawal Agreement, NI Protocol and TCA.

  • Responsibility for decision-making on trade, tariffs and the on-going negotiations with the UK rests with the EU Commission.

  • National initiatives focused on Brexit readiness plan and other such supports as well as certain taxation measures in VAT, Stamp duty.

Specific customs issues

  • Duty free reinstituted for travel to or from Britain. The impending reduction of COVID-19 travel restrictions may lead to an increase in "fiscal travel" and purchase of duty-free tobacco or alcohol.

  • Customs working 24-7 in Dublin Port, Dublin Airport and Rosslare to deal with Brexit challenges.

Capital and savings taxes

CGT

  • CGT Rate: The paper states that there is no compelling case for making a significant reduction in CGT rates at the current time.

  • Entrepreneur Relief (ER): Detailed discussion is given to ways in which ER could be enhanced, specifically through the removal of the current working time requirement, a change to the current lifetime threshold of €1 million, a change in the CGT rate applying to gains in excess of the lifetime threshold; or by amending the current lifetime threshold to a 'per venture' threshold. 

  • Employment and Investment Incentive (EII): The paper also discusses possible enhancements to the EII Scheme including the introduction of CGT loss relief on failed or loss-making EII scheme investments. The paper notes that the UK EIS or SEIS equivalent is more attractive for these reasons. 

  • The argument for enhancing both ER and EII put forward is that the changes will improve competition in capital taxation. However, the paper stopped short of recommending immediate action on either.

CAT

  • Small Gift Exemption: Recommendation to increase the Small Gift Exemption (SGE) from €3k to, for example, €5k.

  • Interest-free Loans: CAT on interest-free loans is based on "the best price obtainable in the open market" for the use of the loaned money. Revenue practice has been to accept the current best financial institution deposit interest rates. The report recommends a change in this practice to the best borrowing interest rate for the same use.

  • CAT Aggregation Periods: Currently when looking at gifts or inheritances, an individual must aggregate all gifts or inheritances since 1991. It is recommended that this aggregation period is curtailed to ease the administrative burden it places on both Revenue and the taxpayer.

  • Agricultural or business relief: Consideration is given to some of the unintended consequences of the reliefs and notes that exchequer yields would increase by curtailing them. However, it notes that limiting agricultural or business relief increases could have a negative impact on the development and growth of family businesses. 

DIRT or LAET

  • The paper notes the treatment of specific financial products has been a source of contention and that arguably there should be no difference between the level of tax applied to sales of individual shares (33%) and the 41% applied to those who invest in 100% equity funds. The paper also notes the debate surrounding the lack of neutrality in the current system particularly in relation to Exchange Traded Funds.

Stamp duty

  • No major stamp duty changes have been mooted.

  • Detailed consideration is given to the English (and Northern Irish) Stamp Duty Land Tax (SDLT) regime, specifically with regard to SDLT on residential property, and whether there is merit in introducing any aspects of that regime to Irish stamp duty. Three options are considered: 1). Lowering the threshold at which the 2% stamp duty rate applies from €1 million to e.g., €750k; 2). Applying the 2% rate to the full value of higher value properties, e.g. properties valued at over €1 million, or over €1.5 million; and 3). Introducing a surcharge on purchases of residential property by non-resident individuals or entities (but note that the equivalent SDLT surcharge only applies in very specific circumstances and does not apply where property is bought to let to an unrelated party). None of these options would necessarily yield significant additional tax revenues.

  • Consideration is given to whether the 7.5% stamp duty charge on purchases of interests in companies, IREFs and partnerships in certain circumstances should also be applied to dealings in REIT shares. The conclusion is that it shouldn’t, and the 1% rate should remain in place.

  • An extension of the bank levy, which yields revenue of €150 million each year, and which is due to expire on 20 October 2021, is being considered.

  • An extension to the relief for transfers of land to young trained farmers, due to end this year, is being considered, as are changes to the maximum qualification age (currently 35 years) and the process for listing the required educational qualifications.

Contact us

Peter Reilly

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6644

Sarah Mahon

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6029

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