The Republic of Ireland government has published its Budget 2024 Tax Strategy Group papers, which among other matters address the risk of VAT on financial services as Ireland has maxed out its exemptions under the VAT Directive.
The TSG meeting took place on 4 July, with the official documents published on 18 July by the Department of Finance, which has chaired meetings since the early 1990s with membership "comprising senior officials and political advisers from a number of Civil Service Departments and Offices".
"Papers on various options for tax policy changes are prepared annually by Department of Finance officials. The TSG is not a decision making body and the papers produced by the Department are simply a list of options and issues to be considered in the Budgetary process. Any papers relating to PRSI and social welfare issues are also prepared for the Group by the Department of Employment Affairs and Social Protection."
Corporation tax and VAT affect the business of providing financial services and products. The TSG paper on VAT notes that currently financial services sits in the 'exempt' category of sectors in which VAT applies - alongside transport services, supply of water, provision of education, medical services and services provided by charities.
However, it also reflects on the European Commission's proposal put forward in 2020 in its Tax Action Plan, to put VAT on financial services. And under the EU's VAT Directive "Ireland already applies a zero rate to 7 out of 7 permitted categories, and a reduced rate to 19 out of 24 permitted categories...Ireland applies a number of reduced rates on the basis of historical derogations, however it is not possible to expand the scope of these derogations."
In regards to the TSG paper on Corporation Tax, there is concern expressed about the concentration risk, ie, a few companies and few sectors accounting for the majority of receipts.
"At sectoral level, the majority of the trading profits can be attributed to five sectors: Manufacturing, Information & Communication, Wholesale & Retail Trade, Financial & Insurance Activities, and Administrative & Support Services were responsible for 90% (€225 billion) of trading profits in 2021."
"The ten largest CT payers in 2022 accounted for €13 billion (57%) of net CT receipts in 2022, a slight increase from 53% in 2021. This proportion has increased significantly since 2020 - over the period 2014 to 2019, the top ten CT payers accounted for between 37% and 45% of net CT receipts."
2This high concentration of receipts within a small number of firms is a recognised vulnerability. It means that receipts from this tax head are highly vulnerable to the business decisions of a small number of multinational companies. As Ireland has been consistently successful in attracting many such leading companies to locate here, and given our level of integration with the global economy, it is not surprising that our corporation tax base has become concentrated."
The paper on Corporation Tax goes on to note that while the government has been able to put related windfall tax receipts into the country's National Reserve Fund, there is an ongoing "strong case" to establish a long-term savings vehicle to pay for projected higher spending - for example as the population ages.
"The benefits of establishing a long-term public savings vehicle would be two-fold. Firstly, it would help to ensure that potentially transitory windfall corporation tax receipts are not usedas a basis to introduce long term expenditure increases or tax reductions. Secondly, such a fund could contribute to meeting known future budgetary pressures, including demographic change and financing the climate and digital transitions."
In a separate paper, Brendan O'Connor, head of Macroeconomics, Economics Division, Department of Finance, outlined economic developments globally, in the domestic Irish economy, and noted the medium term and structural challenges facing Ireland.
As the UK remains a key trading partner to the Republic of Ireland, its economic development has consequences. O'Connor described UK GDP as "an economic 'slow puncture'", contrasting its relatively poor recovery since the economic peak pre-pandemic versus the rate of recovery seen in the US and euro area.
These three key export markets have been staging a recovery, but growth remains relatively weak.
In the Republic of Ireland, the domestic economy seems to be shaking off the impact of inflation at a better pace, with a 5 percentage point decline in the headline rate of inflation over the past year, according to the Department of Finance data.
Meanwhile, the economy is experiencing a rebound in business investment and construction, per data for Q1 2023.
Looking ahead, the main structural challenges facing the Irish economy were described as 'the 4 Ds', meaning demographics, decarbonisation, digitalisation and deglobalisation.
On the point of demographics, the estimates currently are that by 2050, the dependency ration will hit 2:1 from the current 4:1. This will create pressure to further digitise and automate the economy, but here too there are challenges, especially in the SME sector.