October 14, 2021
Ireland announces Budget 2022
Ireland’s Budget 2022 is positioned as part of the path to a better and brighter future following the devastation resulting from COVID-19. The Irish Government has committed over €48 billion in support to the economy and society over three years.
Public spending in 2022 will amount to €87.6 billion with a plan through 2023 to phase out temporary COVID-related spending and repair public finances. Revised projections indicate a combined deficit for 2021 and 2022 of circa €34.5 billion which is a reduction of approximately 40% on the estimate prepared in the summer of this year.
Modified Domestic Demand is expected to grow by 6.5% in 2022. The growth forecast comes with accompanying risks of inflationary price pressures.
Unemployment is expected to fall in 2022 to circa 6.5% with employment projected to reach pre-pandemic levels during the course of next year.
The focus on repairing public finances in the wake of COVID is aimed at reducing debt as a percentage of national income. This is projected to fall from 106% in 2021 to 99% in 2022 and falling below 90% in 2025. By 2022 the budget projects borrowing only for capital spending.
The Budget follows the recent Government announcement of the revised National Development Plan (NDP) which proposes €165 billion of infrastructure investment in the period through 2030. The NDP investments include housing, transport infrastructure, energy and other utilities.
Budget 2022 Overview
Budget 2022 involves a total budgetary package of €4.7 billion. This is split between expenditure measures worth €4.2 billion and tax measures worth €0.5B.
Expenditure measures are largely focused on health, education and social welfare.
The key element of the tax package involves approximately €0.5 billion of expanded individual income tax bands and tax credits designed to offset projected effects of inflation. There are increased carbon taxes of circa €0.2 billion which will be ringfenced against specific environmental spending commitments. There is also provision for increased vehicle registration taxes of circa €0.1B and a similar amount through a bank levy extension and increased levy on tobacco products. The tax increases are offset by a significant number of modest new tax reliefs and extensions and expansions to existing reliefs. A detailed tax alert on these measures can be found here.
This Alert summarizes some of the notable announcements of relevance to international investors.
Other Notable Announcements
Global Tax Reform
The Minister for Finance announced Ireland’s decision to join the G20/OECD Inclusive Framework agreement on 7 October. See EY Global Tax Alert, Ireland joins consensus on G20/OECD International Tax Proposals, dated 7 October 2021 for details.
In the Budget Speech Minister Donohoe reiterated some key points from his speech on 7 October. He also made the following notable statement:
The question of the rate was the biggest challenge for Ireland. So, we successfully made our case. Due to our efforts, the minimum effective rate was set at 15 per cent for large multinational companies. It could have been far higher. It could have been more uncertain. We avoided those risks.
This is why it is in our interest to be in.
When it comes into effect, Ireland will apply the new minimum effective rate of 15 per cent. This will still be less than many of our key competitors.
We will remain an attractive location for investment and we will continue to play to our strengths, centred on a highly educated and dynamic workforce that has consistently delivered innovation and profitability over many decades to businesses that have made Ireland their home.
I know this was a major decision. But it is the right decision for Ireland, for our jobs, for our economy and for our ability to attract and keep investment in our country.
There will be no impact for 2022 from the application of the new 15% minimum rate. There has been no change in previous estimates of a €2 billion annual cost of the two-pillar solution when fully in effect.
The 12.5% rate will be retained for businesses below the Pillar Two turnover threshold of €750 million.
The completion of the transposition of the European Union (EU) Anti-Tax Avoidance Directives (ATAD) into Irish law has been signaled for some time. Full details of the introduction of the interest limitation rule (30% of EBITDA – earnings before interest, taxes, depreciation and amortization) and anti-reverse hybrid rules will be contained in the Finance Bill which is due to be published on 21 October. There is no tax yield projected in the Summary of Budget taxation measures from these rules.
Digital Gaming Sector
As anticipated, the Government has announced a new 32% tax credit for the digital gaming sector on eligible expenditure up to €25m per project. This offers synergies with Ireland’s film and animation industries. Full details and conditions will be contained in Finance Bill 2021. As the credit is subject to EU State aid approval, the relief will be subject to a commencement order.
The Minister confirmed that remote working relief will be put on a statutory basis in Finance Bill 2021 with an income tax relief available to employees for 30% of vouched costs of heat, electricity and broadband. This relief will be kept under review. The electricity and heat relief improves on the 10% rate currently allowed in practice by the Revenue Commissioners. Receipts should be retained to support any claims.
Commission on Taxation and Welfare
The establishment of the independent Commission was announced by the Minister in 2020. It is due to make recommendations in the summer of 2022.
It is tasked with considering how best the tax and welfare systems can support economic activity and promote increased prosperity while ensuring sufficient resources to fund public services on a sustainable basis over the medium and longer term. This includes having particular regard for long-term developments such as ageing demographics, the move to a low carbon economy and the rise of digital disruption and automation.
In the Budget speech the Minister for Finance announced that a public consultation will be launched over the coming weeks to inform the Commission in completing its work.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Ireland), Dublin
Ernst & Young (Ireland), Financial Services, Dublin
Ernst & Young (Ireland), Cork
Ernst & Young (Ireland), Limerick
Ernst & Young (Ireland), Waterford
Ernst & Young (Ireland), Galway
Ernst & Young LLP (United States), Irish Tax Desk, New York
Ernst & Young LLP (United States), Irish Tax Desk, San Jose
Ernst & Young LLP (United States), FSO Irish Tax Desk, New York