Overview

The Minster’s budget today sought to allay the twin weariness of Brexit and Covid “the worst global pandemic in a century” and ease our minds to build a series of tax and related financial measures in these uncertain times.

The Minister stated that “from the ashes of the pandemic we will build a stronger, more resilient Ireland”.

It is the largest and most ambitious budget in the history of the State with a support package of €24.5bn, with the aim of a quick recovery. A deficit of €20.5bn is projected for 2021.

The budget assumes no trade deal between EU and UK, and the absence of a broadly available vaccine in 2021.

The budget has also been heavily influenced by Climate change and the continuing International Tax Reform. On the latter we saw the most recent release of international tax papers from the OECD yesterday – these will impact upon Irish tax policy in the short to medium term. The reports were issued following a meeting of the BEPS Inclusive Framework. The OECD has indicated that these reports will be considered ‘blueprints’ rather than representing final reports on the Pillars. The reports contain significantly more technical detail than the last reports published early in 2020 and give stakeholders greater insight into the technical details of the proposals.

The OECD did release new reports discussing the respective Pillars blueprints, approved by Inclusive Framework members, which describe some areas of general agreement, areas of disagreement and an outline of the steps that lay ahead. The initial step will be to start a period of Public consultation. The Inclusive Framework now seeks to achieve consensus on a global tax update by mid-2021. This seems ambitious.

Concern has been expressed that the lack of global progress will prompt some countries to adopt unilateral measures to tax the digital economy (the UK and Australia have already done so), which would lead to retaliation by the US and other countries in protracted tax and trade wars.

The role of FDI and in particular the contributions to the exchequer made by this sector are key.  The Minister noted that he would issue an updated Roadmap on Corporation Tax. Normally this is published on Budget day and perhaps in view of yesterday’s OECD stalemate, further reflection has to be given to this.

The conundrum faced by the Minister was how to address the twin economies in Ireland – the multinational sector and the domestic economy. He also needed to address how you can persuade taxpayers to release part of their vast savings (circa €10bn.) accumulated in 2020. The potential boost to the economy from such a release of funds would be welcome.

With interest rates at historical lows (in some cases negative), the armory of Central Bankers is virtually exhausted and therefore the role of fiscal policy is paramount in restoring the economy. The Minister has announced a number of significant capital budget measures, buoyed by the availability of cheap funding costs.

The budget forecasts a €20.5bn deficit in 2021 – unprecedented in budget forecasts in the history of the State. The tax package in the budget is just €270m, dwarfed by the over €17bn increase in Government spending.

Measures

The following are the key points from today’s Budget announcements:-

Covid Related Measures

• The current Employment Wage Subsidy Scheme is due to expire on 31 March 2021. The Minister indicated he will consider an extension of this beyond March 2021 if the economy requires this continuing support.
• Tax Debt warehousing is being extended to include the balance of Income Tax for 2019, and preliminary tax for 2020 for the self-employed.
• New Compensation Scheme for businesses such as accommodation, food, the arts, recreation and entertainment – Covid Restrictions Support Scheme (CRSS). The scheme will provide a payment based on 2019 average weekly turnover effective from today until 31 March 2021. Payments will be the calculated on the basis of 10% of the first one million in turnover and 5% thereafter based on average VAT exclusive turnover for 2019. The maximum weekly payment will be €5,000. Qualifying businesses can claim where government restrictions are at Level 3 or above. A business will need to demonstrate that turnover has been severely impacted and that it may not exceed 20% of the turnover for the corresponding period in 2019.
• A reduced rate of VAT of 9% was announced for the hospitality and tourism sector from 1 November 2020 to 31 December 2021.
• Updated Revenue guidance will issue for home workers on credits that can be claimed, including the cost of broadband which can now be included.
• Further commercial rates waiver for the last 3 months of 2020.

Brexit

• A Brexit support package of €340m was announced for 2021.

Climate Change

• The introduction of an increase in the rate of carbon taxes by €7.50 per tonne of CO2 to €33.50. Petrol and diesel prices will increase from midnight tonight.
• Overhaul of the way in which cars are taxed was announced. The vehicle registration tax (VRT) reliefs on Plug-in Hybrid Electric Vehicles and hybrids will be allowed to expire whilst they will be increased for more polluting diesel and petrol models.
• The accelerated capital allowances scheme on energy efficient equipment is extended.

Corporate Tax

• The Knowledge Development Box was due to have a sunset at the end of this year. In view of other economic priorities, it has not been possible to conduct a meaningful ex ante review of the regime, and therefore the Minister announced that the extant regime will be extended for a further 2 years until the end of December 2022. The Knowledge Box is an OECD-compliant intellectual property regime that supports businesses in retaining and exploiting assets that have resulted from R&D activities in Ireland.
• The Minister announced that all intangible assets acquired after today will be fully within the scope of balancing charge rules. Currently such assets have a tax life of five years.
• New tax credit for the digital gaming sector, from January 2022.
• Commitment to the 12.5% rate was restated by the Minister.

International Tax Reform

• The Minister adverted to the changes to Transfer Pricing that will be brought about by BEPS 2.0.  Pillar 1 seeks to review these rules with the primary objective of attributing profits to markets where companies were without a presence. Pillar 2 focuses on the concept of minimum effective taxation. Both changes will influence the corporation tax take, which, despite Covid, has been a strong performer and underpinning the less than expected Budget deficit. This outcome therefore has implications for all taxpayers.
• Yesterday’s OECD stalemate has increased the uncertainty of the timing of introduction and the downsides to the current limbo.The Minister noted that changes to Ireland’s Interest limitations (Thin Capitalisation) would be included in next year’s Finance Act, to be effective from 1 January 2022. Whilst it had been anticipated that this would happen in 2024, the European Commission commenced infringement proceedings in 2019 against Ireland, issuing a reasoned opinion in November 2019. These provisions will increase the cost of borrowing for large corporates. The Minister also noted that Ireland would introduce anti reverse hybrid rules in next year’s Finance Act.
• A technical amendment to our Exit Tax rules to clarify the operation of interest on instalment payments has been introduced. This clarification will be introduced with effect from tonight, by way of Financial Resolution.

Personal Tax

• No significant changes to existing tax bands or credits were announced.
• Earned Income credit increases by €150 to €1,650 in 2021.
• Dependent Relative tax credit increases by €70 to €245.
• USC second rate band increased from €20,484 to €20,687
• Employer higher rate of PRSI weekly threshold increased from €394 to €398.

Capital Taxes

• Despite some kite flying on reducing the rate of Capital Gains Tax from 33% to 20%, no major changes to rates were announced, other than an easing of the shareholding period requirements for Entrepreneur Relief. The ordinary share holding requirement is amended so that an individual who has owned at least 5 per cent of the shares for a continuous period of any three years qualifies for this relief.
• A CGT anti-avoidance measure will be announced later tonight.

Housing Crisis

• A record level of funding of €5.2bn is being provided on housing, with a focus on social and affordable housing.
• €65m fund for deep retro-fitting social housing stock.

Social Welfare

• The rise in pension age to 67 on 1 January 2021 will not proceed. Any revision to the pension age will be subject to the Pension’s Commission which the Minister announced will be established.
• Living alone allowance increased by €5 per week
• Fuel allowance increased by €3.50
• Christmas bonus will be paid
• Parents Benefit to be extended by a further 3 weeks
• Child benefit €5 increase for over 12’s, €2 increase for under 12’s
• Carer’s support grant to be increased by €150 to €1,850

Other Measures

• The Help to Buy scheme has been extended in its present format to the end of 2021.
• Increase in 50c on a pack of 20 cigarettes from midnight tonight.
• Stamp Duty consanguinity relief extended to 31 December 2023. Farm Consolidation Stamp Duty relief has also been extended.
• The farmers flat VAT rate addition for will be increased from 5.4% to 5.6% from 1 January 2021.

The following links will provide further detail:

Ministers Speech:

http://budget.gov.ie/Budgets/2021/Documents/Budget/Budget%202021_budget%20speech_DFinance.pdf

Summary of 2021 Taxation Measures:

http://budget.gov.ie/Budgets/2021/Documents/Budget/Budget%202021_Summary%20of%20Taxation%20Measures.pdf

Tax Policy Changes:

http://budget.gov.ie/Budgets/2021/Documents/Budget/BUDGET%2021_Tax%20Policy%20Changes.pdf