New tax incentives for SMEs should be included in budget to boost domestic businesses

During the pandemic, the powerful performance of our multinational sector insulated our economy from the worst effects of the lockdowns.

However, while the bumper corporation tax receipts are welcome, we have a clear concentration risk. With volatility in the technology sector, reduction in Covid vaccines sales and global tax changes that could redistribute profits and tax to larger economies, how do we wean ourselves off our overreliance on a small number of multinational groups?

The paper published recently by the Irish Fiscal Advisory Council estimates that, in 2022, 10 corporate groups accounted for 60 per cent of all corporation tax receipts. Furthermore, three corporates accounted for around a third of all corporation tax revenues from 2017 to 2021, with technology and pharma being the top sectors.

As the Department of Finance is considering potential budget measures over the summer, I would encourage them to strongly consider strategies to diversify our tax base further. The obvious choice of broadening the tax base is politically unpalatable (remember water charges?) and therefore, unavailable at this point to the Government.

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To my mind, the solution is, therefore, twofold. One, we need to strengthen indigenous business and two, we need to diversify the multinational sector base.

On the domestic front, we should consistently and unapologetically invest in an ecosystem that encourages entrepreneurship, productivity, and employment within the Irish economy to ensure that we have more Irish-owned large tax contributing companies producing high-value jobs and tax receipts.

The diversification of entrepreneurs, their businesses, and the sectors in which they operate is an effective response to our current concentration of receipts.

While Ireland has a significant number of incentives aimed at SMEs, many need to be refreshed and streamlined to make them effective. Schemes such as the Employment Investment Incentive, Start Up Relief for Entrepreneurs and Key Employee Engagement Programme have, in general, not met their intended policy objectives and are cumbersome for small businesses to claim due to the administration involved.

A strategic review of SME tax incentives should be considered in order to create a competitive tax system for the domestic sector. Indeed, this may already be under way by the Department of Finance.

At the Irish Taxation Institute annual dinner in February, Minister for Finance Michael McGrath said he intends to take “a fresh look at all the enterprise tax measures on the table to assess whether they are working properly and fulfilling the potential that we know our economy can deliver”.

The tax that really matters to investors and entrepreneurs is capital gains tax (CGT) and our headline rate, at 33 per cent, is high by international standards. CGT receipts of €1.7 billion in 2022 are still substantially less than the €3 billion collected in 2006 when there was a 20 per cent CGT rate.

Is the high rate dampening transactions and growth in the SME sector? Is it now time to consider a CGT rate that rewards those who set up businesses that provide jobs and pay taxes?

It is clear that Ireland’s foreign investment policies have been hugely successful, particularly the 12.5 per cent corporation tax rate. The 15 per cent minimum tax rate agreed by the OECD Inclusive Framework may not result in existing multinationals leaving Ireland, but could it impact on future investment decisions. In my role supporting foreign groups setting up operations in Ireland, I haven’t any seen evidence of a slowdown in new investments to date.

Indeed, for the earlier life cycle stage groups with global turnover of less than €750 million, the 12.5 per cent rate of tax will continue to apply and Ireland’s wider advantages of being an English-speaking EU country with highly-educated talent remains attractive.

However, it is worth considering if we should seek to encourage specific sectors, aligned to our national priorities such as clean technology or renewables.

With recent reports by the Environment Protection Agency indicating that Ireland will fall short of its greenhouse gas emission reduction target, is there an opportunity to align Ireland’s foreign investment policy with our green agenda?

Many EU countries are using tax incentives to support businesses in reducing their carbon emissions and to encourage investment in green/energy efficient projects and Ireland’s current tax offering around the green agenda is behind the curve.

Previous tax relief for investments in renewable energy project companies expired in 2014 and other reliefs for energy efficient equipment or trading in EU Emissions schemes are narrow in application.

I would recommend that consideration be given to specific targeted measures to encourage investment in key strategic areas. For example, Italy and Portugal have specific tax incentives for ecological design improvements in manufacturing activities. While such regimes could take several years to make a significant impact, they would help with encouraging green investments.

The next budget presents a real opportunity for Ireland to redefine its economic priorities and work towards strengthening the domestic economy and investment policies to shape and protect our future economy.

Competing priorities and demands will make the budgetary process a difficult task, but my hope is that the focus will remain on long-term strategic planning and not short-term political gains.

Karen Frawley is a partner in corporate and international tax with Deloitte