Contributing Firms:
Framing the 2021 Budget and the future tax system
The 2021 Budget will go down in history as one of the great crisis Budgets, due to the unprecedented borrowing that will be needed to deal with the coronavirus crisis, but while spending and borrowing dominates the headlines, the underlying resilience of the Irish economy is a continued theme that underpins the state’s fiscal condition. This is due to the unexpected strong performance of tax revenues in 2020, a timely reminder that the tax system, including, importantly the corporate tax system, remains a pillar of strength of the Irish economy. The Round Table Questions and Answers in this issue cover a broad range of topics, some of which are part of the framework of Budget 2021, but which also address topics that once again serve as a reminder that the strength of the Irish tax eco-system lies not just in internationally competitive rates of tax, but the professionalism and skills that have grown, and continue to grow around it.

Time was when ‘kiteflying’ was the modus operandum for politicians of the ruling Government to float suggested taxation proposals in the months before Budget days, but since then we have properly developed more transparent approaches, such as the publication of pre-Budget Submissions by the Finance Department, and, informed discussion of Budgetary topics represented in the work of the Tax Strategy Group (TSG).

Its annual report is a useful rehearsal of the thinking and research in the tax sphere, and its 2020 report stepped up to the mark admirably with an informative and well document series of contributions.

In this month’s Round Table, Ciara Sharkey provides an overview of the TSG Report, and a number of her colleagues in this month’s Round table address what she identifies as one of the key areas of interest, the Anti-Tax Avoidance Directive (ATAD), and what it might possibly mean in the longer term.

Shane Murphy, Director, Corporate and International Tax, Deloitte takes up the question, pointing out that in the interim Ireland has its own rules in the key area of allowability of interest as a tax relief against corporaiton tax.

Firms should be aware of it in the medium term he advises though, pointing out that ‘it would be recommended that taxpayers potentially affected by the 30% EBITDA rule provided for in ATAD should be actively assessing the impact this may have on them.’ That said, he says, ‘these papers also acknowledge that although the transposition of these rules into Irish law is complex and further consultation is required, it would seem likely that any new rules should be effective potentially from 2022’.

Looking at one of the rationales adduced for the ATAD interest proposal - the encouragement of equity rather than debt in European corporate finance structures - Eugene O’Keeffe, Director, Corporate Tax, Deloitte says ‘perhaps for this to happen there needs to be tax incentives to support equity financing such as deductibility for costs associated with raising capital’.

This would be a function of the sovereign Parliament, and an idea worth taking up, if not in the Budget, perhaps in the Finance Bill.

Another inevitably controversial issue is the discussion in the TSG Report of Class S PRSI contributors, and the putative benefit to them of inclusion in the limited benefits available to such workers of the Social Insurance Fund (a fund designed primarily for employees, rather than the self employed from the outset). (See: Glossary, p16).

Commenting on one of the TSG proposals, Stephen Lowry points out that “If implemented, Class S contributors will be required to pay an overall 7% increase in social insurance contributions annually (effectively bringing the overall tax rate for certain self-employed individuals to circa 62% - taking account of the 3% USC surcharge) – thereby reducing the after tax profits available for reinvestment in the business.”.

That would not go down well with the suffering self employed, and SME electorate whose survival concerns as a result of the Covid-19 crisis are evidently at the centre of the Government’s budget strategy 2021.

Figures revealed in the Tax Strategy paper reveal that the Knowledge Development Box, has by any standards not been a success, as only a handful of companies have availed of it (12 in 2016, 13 in 2017, and ‘less than 10’ in 2020). The TSG report said that “In part this is due to the restrictive requirements of the relief”.

Geraldine McCann, Director, Corporate and International Tax, Deloitte: takes up the running on this, and in a forensic answer she provides a series of insights on the workings of the KDB. In itself her answer is a veritable guideline for policy makers in the Department of Finance, or the OECD, on how to devise truly workable tax incentives around the concept of KDBs.