Irish tax system must change for Ireland to win next wave of high-profit foreign direct investment

It feels for quite some time that Ireland has been a back seat passenger when it comes to tax changes. We’ve dutifully implemented a range of reforms as required by the OECD and EU to ensure a global levelling of the international tax playing field. But while we’ve played our part as conscientious global citizens, we haven’t put enough time and effort into actually improving our overall tax offering and making sure Ireland’s tax system remains best-in-class.

As competition heats up for the next wave of FDI investment – likely to be in high-profit/high-tech industries such as AI-led technology, renewables and biotechnology – now is the time to firmly position Ireland as the top location for foreign and indigenous investment.

We cannot fail to notice the recent changes in corporate tax revenues, which have for the first time in many years, started to come in under projections. Considering this trend in light of our gaping pension hole and the need for climate change investment (projected to cost €12 billion per annum collectively in the medium term), it is really concerning. The extent of the problem, assuming this is more than a “blip” caused by one taxpayer, will become clearer over the coming months. But it reaffirms the need to keep our tax offering strong while maintaining and enhancing our competitiveness.

We see four pillars to enhancing Ireland’s competitiveness. We need to reassess our corporate tax offering, simplify our overall tax system, support innovation among indigenous Irish businesses and invest in key elements of infrastructure and climate action.

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On the corporate tax side, in responding to international tax reform and a changing competitive landscape, we need to see more pro-growth tax initiatives to maintain and enhance Ireland’s differentiators. At a minimum, we need to offer a modern system for taxing foreign profits so that we can guarantee investors setting up in Ireland that they can return profits to investors efficiently.

We should also increase the effectiveness of key regimes such as the knowledge development box and extend special assignee relief to be in the best possible position to win the next wave of FDI. These actions, and others, are crucial to ensuring underachieving projections do not morphe into sharply constricting corporate tax receipts.

As everyone knows, the Irish tax code has got far too complicated and taxpayers are unable to easily access key reliefs and credits. This fact was acknowledged by Minister for Finance Michael McGrath at a recent PwC tax policy event, and again during last Tuesday’s budget. A big effort needs to be made to “reconsolidate” the various taxes Acts (or in layperson’s terms, get rid of the old tax rules and reorganise what’s left). We know this will take time but we hope that the upcoming Finance Bill will start to alleviate some of this complexity for business.

We want to see the indigenous sector grow at the same pace as the multinationals in terms of generating tax receipts and employment. For example, at present multinationals account for about 80 per cent of corporate tax receipts. From a sustainability perspective, this is clearly an area where tax changes could incentivise entrepreneurs and private businesses, reducing the exposure to FDI for the Irish economy. The budget day enhancements to entrepreneurial and retirement reliefs and the increase in R&D credit will go some way towards an improved balance, but that needs to continue to be an area of focus.

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Investing in Ireland’s infrastructure and natural resources is a huge opportunity, not only in meeting our climate targets but opening up investment into this profitable industry. The National Competitiveness and Productivity Council recently warned that “the ‘slow delivery’ of infrastructure is now the chief threat to Ireland’s competitive position”. We need greater and more effective investment in our infrastructure and skills so that Ireland has the capacity to continue to grow sustainably and profitably. And while last week’s introduction of the Infrastructure, Climate and Nature Fund is very welcome, significant additional measures will be required in future years to address the challenges at hand. While much of the support needs to come through non-tax driven behavioural changes (eg planning process improvements, grid capacity, etc) there is also a role for tax-driven measures like capital allowances, supporting green investments by private equity investors and subsidies to encourage citizen-led changes like household retrofitting.

Our economy is in good shape right now. Quite rightly, Budget 2024 tried to strike the right balance between addressing today’s challenges while safeguarding against known and unknown fiscal expenditure. But we still need to see more pro-growth policies and more ambitious climate action. We need to be more proactive in winning the next wave of investment and enhance Ireland’s competitiveness using tax as a lever for both FDI and the indigenous economy.

Paraic Burke is head of tax at PwC Ireland