What will Budget 2024 mean for corporate tax?

1. Pillar Two

Pillar Two represents the most fundamental change to the domestic and global tax environment in decades and will require significant new legislation in the Finance Bill. The Pillar Two rules will apply to multinational groups with consolidated revenues of €750m+ in at least two of the previous four years. Ireland must transpose these rules into domestic legislation by 31 December 2023 to take effect for accounting periods beginning on or after 31 December 2023.

Draft legislation published via two feedback statements shows that the Irish rules align closely with the EU Pillar Two Directive and the OECD guidance. This is helpful for those preparing for Pillar Two based on EU and OECD versions of the rules. We don’t expect many changes in the Finance Bill legislation, but we do expect some tweaks and clarifications.

Aside from the potential for additional tax expense for organisations, one of the major challenges Pillar Two presents will be the administrative burden of new compliance obligations. Safe harbours should reduce this compliance headache to a degree, but we hope that the Finance Bill will go further than the feedback statement provisions in reducing the compliance burden for business.

Overall, we cannot overstate the importance for businesses in getting ‘Pillar Two ready’ as early as possible and making the Department of Finance aware of unintended consequences or unexpected problems with the Pillar Two rules as they apply to your business.

2. Outbound payments

The expected new defensive measures concerning outbound payments could cause difficulty for some Irish corporates. The Department of Finance envisages the rules applying to payments made on or after 1 January 2024 for payments of interest, dividends or royalties to jurisdictions that impose a nominal zero rate of tax on the amount received or that do not impose any such tax.

The draft wording of an earlier feedback statement proposed an extremely wide application of the rules in some areas and included some broad and unclear definitions. If enacted in the same way, it could give rise to several unintended consequences. Hopefully, a much more refined version of the outbound payments measures will be published in the Finance Bill.

3. Managing corporation tax receipts

The vulnerability of the public finances to potentially volatile corporation tax receipts will be a dominant theme in the lead-up to Budget Day. The 2023 Summer Economic Statement predicted an expected slowdown in the growth in corporation tax receipts for the second half of 2023, with the €1bn comparative drop in corporate tax receipts for August 2023 perhaps offering a glimpse of what is to come.

The Department of Finance believes that vulnerabilities in corporation tax receipts are two-pronged in nature. The first risk is the potential impact of the OECD international tax agreement, of which Pillar Two is one part. An initial estimate of the cost of implementation was published in 2020, with corporation tax receipts tentatively assumed to decline by €2bn.

The second risk is one of concentration. Corporation tax receipts last year stood at €22.5bn, a five-fold increase from their level a decade ago. They now account for over a quarter of overall tax receipts. As the corporation tax yield has increased, the source of receipts has narrowed. Last year, just ten firms accounted for almost three-fifths of all corporate tax revenue, with research suggesting that as few as three large payers account for approximately one-third of total corporate tax revenue.

The Department estimates that ‘windfall’ corporation tax receipts (the amount that cannot be explained by underlying drivers and, therefore, may be more vulnerable to a shock) amount to almost €12bn or approximately half of the corporate tax-take this year. Given this backdrop of potential volatility, the Department has flagged a more appropriate fiscal measure, GGB*, which is the headline general government balance excluding windfall tax receipts. Using this metric, an underlying deficit of €1.8bn is forecast for this year. If these receipts were allowed to fund permanent expenditure commitments, a shock to the multinational sector could have “severe implications for the public finances”, according to the Department.

4. Keeping Ireland competitive

As detailed above, we expect the Finance Bill to include a substantial amount of new legislation to implement the Pillar Two rules and new rules to prevent double non-taxation for outbound payments. However, Ireland will require proactive corporate tax measures to maintain its global competitive edge. This will be more important than ever after the global tax reforms come into effect.

The recent release of a project roadmap and public consultation in relation to the introduction of a participation exemption for foreign dividends and branches is a welcome development in this regard. The Minister for Finance has confirmed that the participation exemption, for dividends at a minimum, will be legislated for in Finance Bill 2024, with the intention for it to come into effect in 2025. Input is sought from stakeholders in relation to the design of the exemptions, showing the willingness of the Department of Finance to engage with stakeholders early and introduce a regime that works for everyone while maintaining our competitive edge. 

We also encourage the Department to consider increasing the value of the Research and Development Tax Credit post-Pillar Two through an increase in the rate of the tax credit.  

Finally, actions could be taken to increase the after-tax return for investors in small businesses such as reducing the capital gains tax (CGT) rate to 20% for certain investors, easing restrictions to access Entrepreneurs’ Relief and adapting the EIIS and KEEP schemes to account for a wider range of modern business models.

5. Conclusion

The budget package will have a significant corporate tax element this year. As always, the devil will be in the detail. There will be some surprises, but PwC’s team of tax experts will be available to help your organisation understand how the changes will impact your business.