Changed income tax regime needed if we are to continue attracting talent

For all the drama that attended the Government’s recent decision to sign up to the international tax reform agreement, its impact on our economy is far from clear.

For sure, the Minister for Finance’s success in limiting the minimum effective rate to 15 per cent and in retaining the 12.5 per cent rate for 99 per cent of businesses in Ireland has removed much of the uncertainty and risk from the final Organisation for Economic Co-operation and Development-led (OECD) agreement.

But a lot of work remains to be done by the OECD before we can fully comprehend the impact of the minimum rate and other elements of the agreement on global multinational companies based in Ireland.

As that work gets under way, there are several other moving parts that could yet derail the global pact. Will the Biden administration’s tax reforms be enacted by Congress and if they are, how will they interact with the OECD’s implementation plan? If the US reforms fall, can the agreement be implemented globally and if not, what will the European Union do?

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Many imponderables remain to be solved on the road to implementation but, one way or another, a new international tax order has dawned. And Ireland needs to sharpen its edge if we are to compete with larger economies for our fair share of global investment.

During the pandemic, the powerful performance of our multinational sector insulated our economy from the worst effects of the attendant lockdowns. There is confidence that the companies embedded here, some of them for up to 40 years, will remain. The question is: will the global minimum rate stop the flow of further investment?

There is no doubt that the new order will significantly reduce the scope for competition in corporate tax, but there are other ways in which the government can make Ireland an attractive location for mobile investment.

Issues like housing, school places, health services and good quality public infrastructure are as important to the talented workers we want to attract to our country as they are to those of us who live here. Making Ireland a good place to live and work in is a clear priority.

Our income tax regime is also a differentiator and Ireland’s effective personal tax rates at average salaries and above are high by international standards and have changed very little since the tax increases introduced more than a decade ago in response to the financial crisis.

Is it not now time to consider a CGT rate that rewards those who set up businesses that provide jobs and pay taxes?

The changes in the recent budget are a start, but Irish workers continue to pay more income tax than workers in the UK, France, Germany, Switzerland and Singapore. If we are to compete with these countries for talent, we need a comprehensive review of our personal tax system.

The Commission on Taxation and Welfare begins its work at a critical time for our economy and in accordance with its terms of reference. And now is the time for a review of our entire tax code, including personal taxes to consider how it could enhance our competitiveness and grow our economy in a post-pandemic Ireland.

Ease of doing business is a key factor in attracting investment and in that respect, our tax system falls short. Take for example, the details of changes to our interest limitation rules contained in the Finance Bill which was published last Thursday. These changes are required to bring us into line with EU anti-avoidance measures. As it stands, the legislation governing interest deductibility is excessively complex and runs to nearly 50 pages: over-layering them with these additional rules will make compliance with the legislation extremely tricky.

It may seem minor but simplifying this piece of legislation would send a very positive signal that Ireland is open for business. The Irish Tax Institute will engage with the commission on this and other areas of our business tax regime. A clear and simplified tax system would benefit business and promote increased compliance.

Incentivising innovation

As a small trading economy, foreign direct investment will remain a central part of Ireland’s industrial policy. But it is also clear that we are over-dependent on our multinational sector. As the international tax rules change, we need to examine how our tax system can incentivise innovation and productivity in our domestic small and medium-sized enterprises ( SME) sector.

By the admission of the Minister for Finance in his budget speech, the Employment Investment Incentive Scheme has yet to reach its full potential. We will soon know if the changes announced in the budget will make it more effective.

The tax that really matters to investors is Capital Gains Tax (CGT) and our headline rate, at 33 per cent, is very high. Given the low level of receipts in recent years – 1.8 per cent in 2019 – it is reasonable to ask if the high rate is dampening transactions and growth in the SME sector. Reducing the CGT rate has, in the past, stimulated activity and increased the yield to the exchequer. Is it not now time to consider a CGT rate that rewards those who set up businesses that provide jobs and pay taxes?

Ireland has some excellent examples of homegrown world class domestic businesses. We also have a burgeoning indigenous tech sector and a growing reputation as a centre of software excellence in Europe.

The presence of the world’s largest biotech and pharma companies has generated a thriving med-tech ecosystem with regional hubs focussed on medical devices in the mid-west and pharma in the south.

As we emerge from under the shadow of the pandemic, with all the economic indicators pointing in the right direction, there is a real sense of entrepreneurial energy and vibrancy in Ireland. We need a clear, fair, efficient, pro-business tax system to support it.

To get there, we need a mind shift at official and political level that has trust in our capacity to build for ourselves the kind of high-performance domestic business sector that we have been so successful in attracting into our country over the last 25 years.

Karen Frawley is president of the Irish Tax Institute