Tax Strategy Group Papers – Budget 2020

On Wednesday 18 July 2019 the Department of Finance published the Tax Strategy Group Papers for Budget 2020. There are 12 papers in total:

1. Corporation Tax
2. Real Estate Investment Trusts, Irish Real Estate Funds and Section 110 Companies as they invest in the Irish Property Market
3. Income Tax
4. Climate Action and Tax
5. Tax Incentives for SMEs
6. Pay Related Social Insurance
7. Social Protection Package – Budget 2020 Issues
8. Value Added Tax
9. General Excise
10. Brexit Preparedness – Taxation and Customs
11. Capital Gains Tax, Capital Acquisition Tax, Stamp Duty
12. Tax Expenditures   

The papers can be found here.

We have set out below some key highlights from the papers.

International Tax

• A feedback statement on anti-hybrid rules that are to be introduced from 1 January 2020 will be published in later this month.
• A timeline for the transposition of interest limitation rules is expected to be determined by the end of the month. Indications appear to be an earlier implementation date than 2024.
• With regard to the OECD Multilateral Instrument (MLI) there is no change Ireland’s position in respect of Article 12 (dependent agent definition), however the position will be kept under review.
• A feedback statement on changes to Ireland’s transfer pricing rules will be published in the coming months. Legislative changes and amended Revenue guidance regarding existing transfer pricing rules expected in Finance Bill 2019.
• With regard to digital taxes, the papers note that there is no agreement yet at OECD level on how wide or narrow the pillar 1 work should be. Discussions on pillar 2 are on-going however a potential minimum rate itself has not yet been discussed. Work plan to continue at pace over the coming months.
• Discussion are on-going regarding CCCTB and CCTB however implementation will require unanimity.

Tax Appeals

• Consideration is being given to introducing legislative changes in Finance Bill 2019. Such changes may include:
  • publication of some determinations without redaction;
  • treating appeals as withdrawn where one party fails to appear at a CMC (Case Management Conference); and
  • allowing appeal cases to be suspended pending the outcome of a MAP (Mutual Assistance Procedures.

Income Tax

• As an alternative to amalgamating the USC with PRSI, consideration is being given to ways that income tax could adopt some of the more desirable features of USC.
• To offset the cost of increasing the standard rate band, individualism may be simultaneously advance by increasing the married 1 earner band at a slower pace until the individual tax bank catches up.
• Further increases in the Earned Income Tax Credit may be over 1 or 2 years.
• The papers note that the external review of SARP and FED is to be completed in August, and therefore, does not comment on any potential changes. Depending on the outcome of these reviews, changes could be included in Budget 2020.  
• The current ongoing review of flat rate expenses is expected to be completed by end 2019, with any changes to take effect from 1 Jan 2020.
• With regard to potential reform of pension tax relief and policy decisions are to be put forward for decision in future budgets.

Tax Incentives & SMEs

• KEEP: Issues identified in recent consultation to be considered in further detail and proposals to enhance KEEP to be put forward for the coming Budget. We expect that not all of issues identified in the consultation will be addressed in the Budget and some issues more likely to be addressed than others.
• EIIS: Issues identified in recent consultation to be considered in further detail and proposals to be put forward for the coming Budget. Indications are that there may be some changes directed at smaller, higher risk, higher potential enterprises.
• Entrepreneurs Relief: While the paper notes that it is premature to suggest any changes until receipt of the external review comments would indicate changes may involve increased lifetime limit with narrower base of recipients (without giving rise to State Aid issues). The paper further notes that any changes should retain the relative simplicity of the relief, should not move away from original intention of the relief, and should not extend the relief to passive investments. Indications are that there may not be changes to rules regarding business structures.
• R&D Tax Credit: The paper notes that a review of responses to the recent consultation is ongoing, and lists some suggestions arising from the consultation, but without indication as to what changes may be incorporated in Budget 2020.

Capital Gains Tax

• There have been numerous calls for a reduction in the current rate of CGT of 33% in recent years. The papers suggest that there is inconclusive evidence to support a reduction in the CGT rate. Therefore, we do not expect to see a reduction in the rate in Budget 2020.
• A review of Farm Restructuring Relief is current ongoing. The outcome of the review will inform policy approach in relation to this relief which is currently due to expire on 31 December 2019.

Capital Acquisitions Tax

• The papers outline the exchequer impact of increasing and reducing the rate of Capital Acquisitions Tax (currently 33%), and the cost of increasing the current group thresholds. These changes are to be considered further with no indication as to what changes, if any, may be made. However, it is noted that the Programme for Government aims to increase the Group A threshold to €500k (from €320k currently).
• The papers also notes the exchequer yield from a potential reduction in Agriculture and Business Property Reliefs, but notes the potential negative impact on the development and growth of family businesses from any such change.
• Consideration is also being given to an increase or reduction in the small gift exemption (currently €3,000).

Stamp Duty

• Concerns have been raised by some developers on the efficiency criteria for the Stamp Duty Refund Scheme. The papers note that the Department of Finance is aware of these concerns and will continue to monitor developments.
• The rate of Stamp Duty on the acquisition of commercial property was increased in Budget 2018 from 2% to 6%. The papers suggest that a potential further increase in Stamp Duty is currently being considered. Any increase may involve the re-introduction of a stepped regime which would see lower rates applying for lower acquisition values, as was the case in the past. The papers also recognise that an increase in Stamp Duty rate on non-residential property would impact on development and agricultural land, and on the housing market.

VAT

• Consideration is being given to the following potential changes in Budget 2020:
  • Reform of VAT rates in terms of increasing or decreasing VAT rates, moving zero rated items to higher rates, composite VAT rates and streamlining VAT rates.
  • Reducing the VAT administration on small businesses by increasing the current cash receipts basis threshold of €2m turnover and also increasing VAT registration thresholds.
  • Whether all food supplements should attract the same VAT rate or whether supplements such as sports supplements, slimming aids etc. should attract a different VAT rate. This follows the postponement from the initial plan to apply the 23% VAT rate to most food supplements from 1^st March 2019 and the subsequent public consultation.

• The paper also provides a summary of recent VAT Developments at EU level, and some Brexit VAT considerations. See here for further information.

Excise

• Changes to the Alcohol Products Tax are provided for in the proposed update to the Alcohol Products Directive 92/83/EC. This includes an increase in %ABV threshold for determining taxation of low strength beer, standardised EU-wide definition for cider and measures to improve cross border functionality of existing reliefs for small breweries. These changes are under review in Brussels and may impact on alcohol duties in Ireland going forward.
• Minimum Unit Pricing (MUP) for alcoholic beverage, as provided for in the Public Health (Alcohol) Act 2018, may be introduced. This measure provides for the introduction of MUP at a rate of €0.10 per gram of pure alcohol. This measure will only however be introduced when a similar measure comes into force in Northern Ireland to prevent erosion of excise revenues and to ensure measure is not undermined.
• An update to the Tobacco product tax directive 2011/64/EU is expected imminently. If this legislation does not deal with novel tobacco products, e.g. e-cigarettes or heated tobacco products, the Government will consider taxation policy for these products.
• There are ongoing discussions with regard to the Betting Tax model.

Other Indirect Tax Measures

• Measures have also been introduced which deal with Duty Free sales in a ‘no deal’ Brexit scenario. The UK has not stated its position on Duty Free sales, post Brexit. If the UK decide not to permit Duty Free sales to passenger traffic travelling from the UK to Ireland, then Ireland will trigger a reciprocal protection.