Ireland has a challenging road ahead to meet its environmental goals for 2030 and beyond. To demonstrate its commitment to climate action, one of the key levers available to the Government is tax policy. They can use it to stimulate behavioural change throughout society, and in business. Budget 2022 presents an opportunity to set a range of tax policies with climate goals in mind.
In March 2021, the Government approved the Climate Action and Low Carbon Development (Amendment) Bill 2021 which will set Ireland on the path to net-zero emissions by 2050.
Throughout 2021, there will be a number of developments at EU level which will have an impact nationally.
This Submission focuses on the tax levers the Department of Finance could consider that would signal Ireland's commitment to tackling climate change and support decarbonisation efforts across the economy and society as a whole.
The ideas we present have a direct or indirect link to promoting investment, encouraging job creation and contributing to socio-economic prosperity.
In this submission, we focus on four areas that we believe play a critical role in Ireland's decarbonisation journey.
To support continued economic growth and an expected population increase in the coming decades, Ireland's electricity supply will need to grow. And it will need to grow in a greener, more sustainable way to support our decarbonisation journey. Our ideas for the sector range from promoting activity, R&D and investment to maximising cash flow for long term projects that put us on an equal footing with our European counterparts.
Environmental taxes act as a key deterrent to behaviours that are contrary to our climate action goals. Our ideas explore potential changes in the areas of customs and trade and Mineral Oil Tax, focusing on the role of biofuels and biogas. We also consider a key environmental tax incentive; accelerated capital allowances for energy efficient equipment which is a very valuable cash flow benefit for businesses.We believe there is an opportunity to improve this relief through widening the scope of qualifying assets, simplifying the scheme and reducing the administrative burden on taxpayers substantiating their claims.
The Financial Services sector in Ireland has a key role to play in climate action. It can do so in a manner which improves Ireland from a sustainability perspective while simultaneously facilitating economic growth. We believe that a focus on promoting the establishment of Irish ESG funds and investment therein is required. With some further tweaks to our current domestic tax regime and by implementing future tax legislation, notably the ATAD Interest Limitation Rules, Ireland can become a centre for excellence in the area of sustainable finance.
Ireland's housing supply and approach to retrofitting: A focused approach to retrofitting homes (including associated upskilling) would not only stimulate activity in the economy, it would also help provide for much more healthy, ergonomic and energy efficient workspaces for the new wave of e-worker in a post COVID-19 world.
Promoting positive corporate and consumer behaviour in the area of mobility: Our ideas focus on the use of public transport and the adoption of electric vehicles. We have considered how individuals can be further incentivised to use public transport, noting in particular, the changes in commuting patterns post COVID-19. In addition to, how the use of hybrid or electric vehicles at the individual consumer or employer level can be further incentivised.
We have the following recommendations across a number of tax areas which could assist in supporting the renewable energy sector:
Changes to or reinvigoration of the tax regimes relating to investment by individuals and corporates in renewable energy companies.
A broad implementation of the exemption for long-term public infrastructure projects is critical to ensuring that the country meets our renewable energy targets on the transition to net zero.
Revising capital allowances on grid connection costs would have a substantial impact on the cost of building a renewable energy project and could ultimately reduce the cost to the consumer.
Changes to the treatment of pre-trading expenses and losses during the development and construction stages of renewable energy projects would allow tax law to align with the life cycle of such projects.
A consultation to understand the current scope of the R&D tax credit in the context of sustainability innovation would be welcomed. Consideration could be given to whether an extension of the scope of the R&D tax credit to include innovation in the area of sustainability is needed.
There are some changes that could be considered in the areas of VAT and RCT which would positively benefit the sector from a cash flow and administrative perspective.
In order to support the renewable energy sector at a national level, a release of guidance for temporary admission and how this applies to the renewable energy sector through the use of 'means of transport' or 'professional equipment' import provisions.
In relation to customs classification of specific environmentally friendly products, a number of key goods that are paving a way towards our climate action goals attract a positive rate of customs duty and consideration should be given at EU level to whether this is contributable to our overall climate goals.
It may be possible to extend the requirements under the Biofuels Obligation Scheme to other sectors where mineral oils are utilised. An example of this may be the heating sector where there is already a high usage of fossil fuels. Expanding the Biofuels Obligation Scheme provides the opportunity for a number of off-grid and older homes to decarbonise and become more fuel efficient. The percentage levy can be lower to begin with and increase over time subject to availability of sufficient biofuel and energy resources.
It may be possible to make amendments to the current relief in order to increase its utilisation. Our ideas include widening the scope of qualifying assets and simplifying the current scheme. The ideas could all be used in conjunction with each other to create a more attractive and effective scheme.
To encourage Irish investors to invest in sustainably focused projects and initiatives, we recommend the introduction of a 20% rate of IUT and LAET for funds and insurance products which invest in sustainable activities.
To promote Ireland as a hub for global ESG investment, the government should consider
A relaxation of the "trading" requirement for the substantial shareholdings capital gains tax exemption (under Section 626B);
An expansion of Section 21B to allow the 12.5% rate of corporation tax to apply to dividends received by Irish companies;
The introduction of a withholding tax exemption on dividend payments made by Irish companies; and
The broadening of the rules governing the Employment Incentive Investment Scheme to cater for investors in pooled investment vehicles; where the economic activity undertaken by the company qualifies as environmentally sustainable.
An amendment should be made to bring the Investment Limited Partnership within the Section 172A(1) exemption for dividend withholding tax to ensure the attractiveness of the ILP as an ESG investment fund.
The relief afforded by Section 541C, which applies capital gains tax treatment (at a rate of 15%), to carried interest for certain venture fund managers, should be widened to apply to carried interest earned by senior Irish resident employees of an ESG fund manager.
A broad implementation of the exemption from the interest limitation rules for long-term public infrastructure projects is required, to ensure that investment in Irish renewable energy projects and sustainably focused initiatives remains an attractive prospect to investors.
In order to support Ireland's position as a global aircraft leasing hub, we propose extending the accelerated capital allowances regime under Section 285A to apply to energy efficient or sustainable fuel type aircraft.
In order to incentivise homeowners and landlords to retrofit their properties, consideration could be given to a 'Help to Insulate' scheme. This could be an extension of 'help to buy' to apply to purchasers of second hand homes with low BER (D-G). Other measures could include:
a property tax credit for retrofit costs
CGT relief on disposal of properties which have been retrofitted
reduced stamp duty costs on acquisition or a refund of stamp duty were retrofitted shortly after acquisition.
Finally, improvements to the grant scheme would also be welcomed.
In order to promote the use of public transport and take account of a more flexible commuter in a post COVID-19 world, consideration could be given to the following measures:
ability to claim tax back on public transport in a more flexible and extensive way
introduction of a tax deduction for commuting expense
reintroduction of tax relief for investment in park and ride facilities.
The adoption of electric vehicles is critical to decarbonisation of the transport sector. More specific measures and expansion of existing measures in the areas of Hybrids or EVs could be considered in order to further incentivise this area. Our ideas include
a general scheme of tax incentives for Hybrids or EVs
lower rates of VRT or motor taxes for hybrid vehicles
incentives for companies using electric vehicles as company vehicle fleet
reduced VAT on electric cars or hybrid cars
a trade in option whereby old vehicles are exchanged for electric bikes
The ideas we have presented range from simple to complex, and from high to low impact. We believe a variety of measures across the economy and society will result in a more progressive approach to climate action. They will encourage positive behavioural changes which will support Ireland's decarbonisation efforts.
Budget 2022 offers an opportunity to build back greener and put Ireland on a trajectory towards achieving its ambitious climate targets. Read our insights and recommendations here.