September 30, 2022
Ireland announces Budget 2023
On 27 September 2022, the Irish Minister for Finance, Paschal Donohoe, presented Budget 2023.
Due to a strong post-pandemic rebound in the economy, the Irish Government's budgetary response to the global energy and cost of living crises was delivered from a position of relative strength.
The overall package of €11 billion is comprised of budgetary measures for 2023 worth €6.9 billion together with an additional €4.1 billion in one-off expenditures that is focused on providing support, not only to individuals and families, but also to businesses in dealing with rising energy prices.
Notably, no extra borrowing was required to fund the Government's €11 billion budgetary package, with the significant incremental spending possible, Minister Donohoe said, due to the strength in tax revenues (which are approximately €10 billion ahead of the same period last year) which is reflective of the Irish economy's robustness as it emerges from the COVID-19 pandemic. Minister Donohoe also noted a projected General Government surplus of €1 billion for 2022, together with a projected €6.2 billion surplus for 2023.
Minister Donohoe further noted that the Irish labor market has made a remarkable recovery over the past year, with record employment levels being registered and an unemployment rate falling to 4.3% as of August 2022.
Headline inflation is forecasted at 8.5% for 2022, and just over 7% for 2023.
A key challenge for Budget 2023 is balancing the need to help households and businesses combat rising costs without further fueling inflation. To do this, Minister Donohoe doubled the size of the tax package and increased public expenditure for 2023, while signaling that future budgets will aim to stay within the parameters of the medium-term budgetary strategy as set out in the previously released Summer Economic Statement.1
Minister Donohoe also confirmed that €2 billion this year, and €4 billion in 2023, will be directed into a National Reserve Fund, where the funds will be used to provide the Irish Exchequer with "additional firepower to respond to challenges over the coming years."
Notable Budget 2023 announcements for international investors
In the sections that follow, we have summarized some of the notable announcements of most relevance to international investors starting with a statement from Minister Donohoe as part of his Budget 2023 speech:
In addition to our 12.5 per cent headline tax rate we will also ensure that we continue to play to our traditional strengths such as a forward-looking business environment and an educated and dynamic workforce.
In a positive development insofar as Ireland's competitive foreign direct investment offering is concerned, Minister Donohoe announced an extension to a number of existing personal tax reliefs to 31 December 2025, including:
Another significant development was the doubling of the Small Business Exemption from €500 to €1,000 where employers can provide up to two tax free vouchers to employees to the value of €1,000.
Temporary business energy support scheme
Minister Donohoe announced the introduction of a scheme to assist companies carrying on a trade in Ireland with their energy costs. It is proposed that the scheme will operate by comparing the average unit price for the relevant billing period in 2022 with the average unit price in the corresponding reference period in 2021. If the increase in average unit price is more than 50%, support will be calculated on the basis of 40% of the amount of the increase. A monthly cap of €10,000 per trade will apply and an overall cap (not yet announced) will separately apply. Businesses will be required to register for the scheme and to make claims within the required time limits.
Global tax reform
Minister Donohoe reiterated Ireland's commitment to the Organisation for Economic Co-operation and Development's (OECD) Two-Pillar Agreement to address the tax challenges arising from digitalization and separately noted Ireland's long-standing position that coordinated multilateral action is the best approach to ensuring that the international tax system keeps pace with the changes in how business today is conducted internationally.
While Ireland will continue to engage intensively at OECD and European Union level to follow through on the OECD Two-Pillar Agreement commitments, Irish legislation to introduce the Pillar Two minimum tax rules is not expected in this year's Finance Act.
Territorial System of Taxation
EY welcomes the announcement by Minister Donohoe that serious consideration of options for a move towards a territorial corporation tax system is continuing in conjunction with work to develop the elements required to give effect to the Pillar Two minimum tax rules.
A public consultation seeking stakeholder views on a possible move to a Territorial System of Taxation was launched in December 2021 and EY has been actively engaged with Irish policy makers in this regard.2 The introduction of a territorial regime could be effective from 2024 in line with the proposed timeline for the Pillar Two minimum tax rules.
While no legislation to introduce the Pillar-Two minimum tax rules is anticipated in this year's Finance Act, Minister Donohoe announced two notable amendments to existing incentives to achieve better alignment with the Pillar Two Model Rules.
Research & Development Tax Credit Regime
The Research & Development (R&D) tax credit is a key incentive for companies performing R&D in Ireland. A 25% refundable credit is available in addition to the general tax deduction for R&D expenditure. Earlier this year, the Irish Department of Finance conducted a public consultation on the R&D tax credit. As part of this consultation, EY recommended that a number of changes should be made to the existing R&D tax credit regime to ensure that that it is aligned and compliant with broader international tax reform efforts. EY welcomes Minister Donohoe's announcement that Finance Act 2022 (to be enacted in December 2022) will introduce amendments to the payable element of the R&D tax credit scheme which will ensure the regime is regarded as a "qualifying refundable credit" for the purposes of the Pillar Two Model Rules. This change is also intended to protect the value of the regime in an international context. These changes reflect EY's feedback to the public consultation.
Knowledge Development Box
The Knowledge Development Box (KDB) regime, which encourages companies to develop certain types of intellectual property in Ireland, has been extended for a further four years to 31 December 2026.
In recognition of the changes anticipated in the broader international tax environment, specifically under the OECD Pillar Two agreement, the effective rate under the KDB regime is to be increased from 6.25% to 10%. The KDB rate change will come into effect from a date to be set by a future commencement order to be determined by reference to the international progress made on the implementation of the Pillar Two and the Subject to Tax Rule. EY will continue to engage with Irish policy makers advocating potential improvements to the KDB regime aligned with Ireland's stated commitment to ongoing competitiveness.
Further legislative detail regarding the proposed changes to the aforementioned business tax incentives will be included within the Finance Bill to be published on 20 October 2022.
Digital Gaming Sector
While first announced as part of last year's Budget (Budget 2022), the European Commission has recently approved a tax credit scheme in Ireland to support the development of digital games that promote Irish or European culture. The new 32% tax credit for the digital gaming sector on eligible expenditure up to €25m per project will run until 31 December 2025.
Other notable Budget measures
A number of key tax measures and changes were announced in Budget 2023 including a widening of personal income tax bands, an increase in personal tax credits and the provision of substantial energy supports to individuals and businesses in Ireland. There are no changes to employer social security proposed in Budget 2023.
In addition, extensions and amendments to other housing and property-related tax measures were also announced. These measures will be key to stimulating increased residential market supply and maintaining Ireland's position as a preferred location for international investment.
The Finance Bill which will contain more detailed information on the Budget announcements and other proposed tax changes is scheduled to be published on 20 October. A Tax Alert will be issued shortly after publication of the Bill.
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
2 See link for EY's response to the Public Consultation on a Territorial System of Taxation.