A modified tax regime is necessary if we are to continue to attract talent
Despite all the drama that accompanied the government’s recent decision to sign the international agreement on tax reform, its impact on our economy is far from clear.
Certainly, the success of the Minister of Finance in limiting the minimum effective rate to 15 per cent and maintaining the rate of 12.5 per cent for 99 per cent of businesses in Ireland has removed much of the uncertainty and risk of the final version of the Organization for Economic Cooperation. operating and development agreement (OECD).
But a lot of work remains to be done by the OECD before we can fully understand the impact of the minimum rate and other elements of the agreement on global multinational companies based in Ireland.
As this work progresses, several other moving elements could still derail the Global Compact. Will the Biden administration’s tax reforms pass Congress and, if so, how will they interact with the OECD implementation plan? If US reforms fail, can the deal be implemented comprehensively and if not, what will the European Union do?
There are many contingencies to be resolved on the road to implementation, but somehow a new international tax order has been born. And Ireland must hone its advantage if we are to compete with the major economies for our fair share of global investment.
During the pandemic, the powerful performance of our multinational sector protected our economy from the worst effects of the resulting bottlenecks. It is certain that the companies established here, some of them up to 40 years, will stay. The question is: will the global minimum rate stop the flow of additional investment?
There is no doubt that the new decree will significantly reduce the scope for competitive corporate tax, but there are other ways the government can make Ireland an attractive place for mobile investing.
Issues like housing, places in schools, health services and good 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 great place to live and work is clearly a priority.
Our tax system is also a differentiator and effective personal tax rates in Ireland for middle and top wages are high by international standards and have changed very little since tax increases introduced over ten years ago. years in response to the financial crisis.
Isn’t it time now to consider a CGT rate that rewards those who start businesses that create jobs and pay taxes?
The changes in the recent budget are a start, but Irish workers continue to pay more income taxes 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 income tax system.
The Committee on Taxation and Social Protection begins its work at a critical time for our economy and in accordance with its mandate. And now is the time to review our entire tax code, including personal taxes, to see how it could improve our competitiveness and grow our economy in post-pandemic Ireland.
The ease of doing business is a key factor in attracting investment and, in this regard, our tax system is inadequate. Take for example the details of the changes to our interest limitation rules contained in the finance bill that was published last Thursday. These changes are necessary to bring us into compliance with EU anti-avoidance measures. As it stands, the legislation governing the deductibility of interest is excessively complex and has almost 50 pages: their superimposition with these additional rules will make compliance with the legislation extremely delicate.
It may seem minor, but simplifying this legislation would send a very positive signal that Ireland is open for business. The Irish Tax Institute will engage with the commission in this and other areas of our business tax system. A clear and simplified tax system would benefit businesses and promote greater compliance.
As a small commercial economy, foreign direct investment will remain a central element of Ireland’s industrial policy. But it is also clear that we are too dependent on our multinational sector. As international tax rules change, we need to consider how our tax system can encourage innovation and productivity in our domestic small and medium-sized enterprise (SME) sector.
According to the Minister of Finance in his budget speech, the Employment Investment Incentive Scheme has not yet reached its full potential. We will soon know whether the changes announced in the budget will make it more effective.
The tax that really matters to investors is the Capital Gains Tax (CGT) and our overall rate, at 33 percent, is very high. Considering the low level of revenue in recent years – 1.8% in 2019 – it is reasonable to question whether the high rate is holding back transactions and the growth of the SME sector. The drop in the CGT rate has, in the past, stimulated activity and increased the yield of the Treasury. Isn’t it time now to consider a CGT rate that rewards those who start businesses that create jobs and pay taxes?
Ireland has excellent examples of world-class national companies. We also have a thriving indigenous technology sector and a growing reputation as a center of software excellence in Europe.
The presence of the world’s largest biotech and pharmaceutical companies has generated a thriving medical technology ecosystem with regional hubs focused on medical devices in the Midwest and pharmacy in the south.
As we emerge from the shadow of the pandemic, with all economic indicators pointing in the right direction, there is a real sense of energy and entrepreneurial drive in Ireland. We need a clear, fair, efficient and business-friendly tax system to support it.
To get there, we need a change of mindset at the official and political level that is confident in our ability to build for ourselves the kind of high performing domestic industry that we have been so successful at. to attract to our country over the past 25 years.
Karen Frawley is President of the Irish Tax Institutee