Budget 2017 Overview
Budget 2017 was announced by the Minister for Finance on 11 October. Much of the content was well flagged in advance and the overall theme of the Budget was that of prudence. Brexit featured prominently and measures were announced to address the economic risks and potential opportunities for Ireland as a result of the UK's decision to leave the EU. The tax measures announced were relatively modest and are mainly in the area of personal taxes with some targeted measures proposed for certain business sectors. The Minister once again took the opportunity to reaffirm Ireland's commitment to its 12.5% corporation tax rate and to meeting international tax standards while also delivering certainty for businesses and maintaining Ireland's competitiveness.
Below is a summary of the measures announced in key sectors that are relevant to our clients as well as personal tax measures which may be relevant generally. Further details and measures will be contained in the Finance Bill which is due to be published on or around 20 October.
Relevance to our Clients and Practice Areas
- The Minister referred to the draft amendments that were published last month in relation to the tax treatment of Section 110 companies investing in Irish property assets. No further details were released and revised amendments will be included in the Finance Bill. We are monitoring these developments closely.
- While no specific details were provided, the Minister confirmed that he intends to publish amendments to address issues arising in relation to investment funds and Irish property in the Finance Bill after appropriate consultation has taken place. The lack of an announcement as to the specific measures which will be proposed creates continued uncertainty in relation to existing and future investments in Irish property by regulated funds.
- While no specific measures were announced in this area, the amendments to the SARP regime and FED scheme may be of interest to clients with internationally mobile workforces (discussed below).
- In a welcome development which was well publicised pre-Budget, the Minister announced an income tax rebate for first time buyers. Under the Help-to-Buy Scheme, a rebate of income tax paid over the previous four years will be granted as a contribution to the deposit required to fund the purchase of a new home. The maximum rebate available will be 5% of the purchase price of a new home valued at up to €400,000 (i.e. €20,000). For new homes with a value between €400,000 and €600,000 the relief will be capped at €20,000 (i.e. the maximum relief). No rebate will be available for new homes with a valuation over €600,000. The house must be a new build and applicants must take out a mortgage of at least 80% of the purchase price (or in the case of a self-build, 80% of the valuation approved by the mortgage provider). The scheme will apply to applicants who have signed contracts to purchase their home on or after 19 July 2016, or, in the case of a self-build, applicants who drew down the first tranche of their mortgage on or after 19 July 2016. The scheme will run until 31 December 2019.
- The tax free rental allowance under the Rent a Room Scheme will be increased from €12,000 to €14,000 per annum. The exemption does not apply to short-term rentals such as Airbnb, the income of which is subject to tax at an individual's marginal income tax rate.
- Mortgage interest relief which was due to expire on 31 December 2017 will be extended to 31 December 2020 (mortgages taken out after 31 December 2012 do not qualify for this relief).
- Another welcome measure is that the 75% cap on interest deductibility against residential property rental income will be increased and phased out over the next 5 years.
- The Home Renovation Incentive Scheme (which provides for tax relief by way of tax credit at 13.5% of qualifying expenditure on repair, renovation or improvement works carried out on a main home or rental property) which was due to expire on 31 December 2016 will be extended to 31 December 2018. In addition, the Living City Initiative (which provides tax relief for qualifying expenditure incurred on both residential and certain commercial refurbishment and conversion work in certain regeneration areas) will be expanded to include landlords and certain qualifying conditions will be removed.
- However, in the context of regulated funds, the lack of an announcement by the Minister as to the specific measures which are to be proposed in relation to regulated funds investing in Irish property creates continued uncertainty in relation to existing and future investments in Irish property by regulated funds.
- Continuing an annual theme, the Minister reaffirmed Ireland's commitment to its 12.5% corporation tax rate. He also highlighted Ireland's attractiveness for foreign direct investment, citing, in addition to the 12.5% corporation tax rate, Ireland's highly educated workforce and business friendly environment, and Ireland's advantages as an English speaking economy in the Eurozone and the critical mass in the financial services and other key sectors.
- Domestic businesses will welcome improvements in relation to the capital gains tax (CGT) entrepreneur relief which was introduced last year, with the Minister announcing a reduction in the rate of CGT from 20% to 10% on the disposal in whole or part of a qualifying business. The €1m lifetime limit on chargeable gains eligible for the relief is unchanged but will be reviewed in future budgets.
- Measures to enhance Ireland's international personal tax competitiveness were announced in terms of extensions to the SARP regime and the FED scheme. The Special Assignee Relief Programme (SARP) which has been in existence since 2012 has been extended for a further three years to 31 December 2020. This relief reduces the Irish income tax cost and as a consequence the equalisation cost to employers assigning skilled individuals and key decision makers from abroad to take up positions in Irish based operations of the employer or an associated company. The relief is seen as a key measure in seeking to avail of some of the opportunities which may arise for Ireland as a result of Brexit.
- The Foreign Earnings Deduction (FED) which provides income tax relief for Irish resident employees working in certain foreign jurisdictions will also be extended to 31 December 2020 and the list of qualifying countries expanded to include Pakistan and Columbia1. In addition, the minimum number of days required to be spent abroad for the purposes of the relief will be reduced from 40 to 30 days.
- The Start Your Own Business Scheme which provides relief from income tax for long term unemployed individuals who start a new business is to be extended for 2 years until 31 December 2018.
- A sugar tax on soft drinks will be levied on manufacturers and importers of sugar-sweetened drinks from April 2018. The tax will be in line with the UK regime which will also be introduced in April 2018. A public consultation process on the tax will be commenced.
- Following on from a public consultation and review of share-based remuneration earlier this year, the Minister announced his intention to develop a new, SME-focussed, share-based incentive scheme, to be introduced in Budget 2018. No details were provided other than the Minister confirming that engagement with the European Commission will commence to ensure that the incentive will comply with State Aid rules.
- A future change in the 1% rate of stamp duty currently applicable to transfers of shares in Irish incorporated companies was indicated as a possible measure to address the potential economic risks posed by Brexit. In a document released as part of Budget 2017 the Department of Finance indicated that it is proposed to carry out a review in 2017 of the application of stamp duty on stocks or marketable securities of an Irish incorporated company in the context of the sustainability of the stamp duty yield and the future UK relationship with the EU. This could indicate a future abolition of stamp duty on Irish share transfers or a reduction to the equivalent 0.5% rate of stamp duty charged in the UK on UK share transfers, and would be a welcome development.
- The UK's decision to exit the European Union and the associated risks to the Irish economy was a key theme of the Minister's Budget speech. In addition to announcing specific measures to assist particular sectors of the Irish economy which may be adversely affected by Brexit, the Minister published a sectoral analysis of the exposure of the Irish economy together with a summary of the results of that analysis. The publications are available here and here.
- Controlling the public finances through budgetary policy was identified as a key mitigant to the risks posed by Brexit. In addition, a number of tax measures are to be introduced / strengthened in light of Brexit, such as the retention of the 9% VAT rate for the hospitality sector / staff, measures to assist the farming and agri-food sector, the extension to the SARP, FED and the Start Your Own Business schemes outlined below, the reduction in the rate of CGT applicable to entrepreneurs, and a review of the 1% stamp duty charge on share transfers.
Update on Ireland's international tax strategy
- In tandem with the Minister's Budget speech, the Department of Finance released its second annual Update on Ireland's International Tax Strategy which sets out Ireland's response to international tax developments during the course of the year and maps out the next steps for Ireland in the year ahead.
- In line with the established practice of carrying out periodic reviews of key areas of tax policy, the Minister also confirmed the launch of a review of Ireland's corporation tax code which will include consideration of what further actions Ireland may need to take to ensure that Ireland is fully compliant with OECD BEPS recommendations. The review is to make recommendations to the Minister for Finance by the end of Q2 2017. The terms of reference include further implementing Ireland's commitments under the OCED BEPS project, delivering tax certainty for business and maintaining the competitiveness of Ireland's corporation tax offering.
- The Update also addresses Ireland's engagement with EU tax proposals, noting that it will engage fully in discussions on the European Commission's relaunch of its proposal on the CCCTB Directive. However, the Update confirms that Ireland continues to disagree with any harmonisation of tax rates, minimum levels of taxation or the inappropriate encroachment of State aid rules into the core Member State competence of taxation.
- The Update is available here.
Personal tax measures
- Certain measures were announced to enhance Ireland's personal tax regime. While these measures are welcome, further measures are required to lower Ireland's personal tax burden and improve Ireland's personal tax competitiveness.
- The capital acquisitions tax (CAT) lifetime tax-free threshold for gifts and inheritances is to be increased in the parent to child group (Group A) from €280,000 to €310,000. The Group B threshold (gifts and inheritances made to parents, siblings, nieces, nephews or grandchildren) is to be increased from €30,150 to €32,500. The Group C threshold (gifts and inheritances made to all other persons) is to be increased from €15,075 to €16,250.
- While improvements in relation to entrepreneur relief were announced, the general 33% rate of CGT remains unchanged.
- USC. Incomes of €13,000 or less continue to be exempt from the USC. However, reductions in relation to the lower rates of USC were announced as follows:
(a) €0 to €12,012 – rate to be reduced from 1% to 0.5%.
(b) Income from €12,013 to €18,772 – rate to be reduced from 3% to 2.5%.
(c) Income between €18,773 - €70,044 – rate to be reduced from 5.5% to 5%.
(d) Income between €70,045 - €100,000 – 8% (no change)
(e) PAYE income in excess of €100,000 – 8% (no change)
(f) Self-employed income in excess of €100,000 – 11% (no change)(3% surcharge) In practical terms, this will mean a single person taxed under PAYE earning €55,000 will receive an increase of €5 per week.
- A further measure to reduce the discrepancy between the tax treatment of self-employed and employed individuals was announced with an increase in the earned income tax credit for self-employed taxpayers by €400 to €950. This remains below the PAYE credit of €1,650 per annum for employed individuals and the self-employed remain subject to the 3% USC surcharge on income over €100k.
- The rate of DIRT will be reduced from 41% to 39% with a commitment that it will be decreased by 2% each year for the next 4 years until it goes back to the 2013 level of 33%.
- €35m will be provided to fund the Single Affordable Childcare Scheme from September 2017. The scheme will provide both meanstested subsidies (based on parental income) for children between 6 months and 15 years and universal subsidies for all children aged 6 months to 3 years attending a Tusla registered childcare provider. The subsidies will be paid directly to the childcare provider.
- The phased reduction in the restriction on mortgage interest relief for rented residential property outlined above will be welcomed by landlords.
- In the wake of the so-called "Panama Papers" earlier this year, the Minister also announced a programme of targeted compliance intervention against individuals engaged in offshore tax evasion with a proposal to deny the use of the voluntary disclosure regime from May 2017 and to introduce a new strict liability criminal offence to facilitate the prosecution of serious cases of offshore tax evasion.
- In terms of economic
indicators, the following statistics contained in the Economic and
Fiscal Outlook are worth noting:
- GDP is forecast to increase by 4.2% in 2016 and increase by 3.5% in 2017.
- Employment growth of 2.6% (52,000 jobs) is projected for 2016, with the unemployment rate expected to average 8.3%. For 2017, employment gains of 2.1% (43,000 jobs) are anticipated, with unemployment set to average 7.7%.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.