Introduction

The Irish Economy has been in the spotlight in recent months as the Greek sovereign debt crisis dominoes into Ireland and onward to Portugal and elsewhere.  International interest has been high as the impact of market turbulence on Ireland has opened up a debate about the fault lines within the Euro and the need for further fiscal integration in Europe.

The agreement reached with the European Stability Fund is positive for Ireland providing a stable source of funding at reasonable rates for the foreseeable future and a mechanism to restructure the Irish banking industry to a more sustainable level.  We anticipate that Ireland will move to the back pages in the coming months as the focus of market turbulence moves to other Sovereigns.

On 7 December 2010, the Irish Minister for Finance announced the toughest Budget in the history of the State.  This provides the detail around the measures highlighted in the National Recovery Plan 2011 – 2014 (colloquially known as “the Four Year Plan”).  The key message for multinationals is that the 12.5% corporation tax rate has been maintained.  The unequivocal support by all Government parties for the 12.5% corporate tax rate has been welcomed by both investors into, and advisers in, Ireland.  

The main highlights of the Budget from an international perspective are:

Business Taxes

• No change to Ireland’s 12.5% Corporation Tax Rate.  In line with the announcement in the National Recovery Plan, the Minister for Finance has restated the Government’s commitment to the 12.5% corporation tax rate.  The 12.5% rate of corporate tax is a fundamental part of the Irish international brand.  Since its introduction, each successive government has reiterated support for maintaining the 12.5% rate of tax.
• The Corporation Tax exemption for start up companies has been extended to cover new trades commencing in 2011.  Relief is now linked to the amount of employers’ PRSI paid by the company subject to certain limits. 
• The current Business Expansion Scheme will be reformed and will become an Employment and Investment Incentive Scheme.  The new scheme will increase the amount that companies can raise from €2 million to €10 million (with a cap in any 12 month period of €2.5 million).  This scheme is subject to European Commission approval.  
• Patent royalty exemption abolished with effect from 24 November 2010.
• Significant reform of Relevant Contracts Tax (“RCT”) proposed with a new withholding tax rate of 20% to be introduced for sub-contractors registered for tax with an established compliance record. A rate of 35% will continue to apply to sub-contractors not registered for tax.  The RCT regime applies to contractors in the construction, meat processing and forestry sectors.  Increased reporting requirements are also being introduced for RCT principals to improve compliance and reduce fraud.  It is also proposed to abolish monthly repayments and for an off-set system against taxation to apply.  This may impact adversely on foreign contractors operating in Ireland.

Property Taxes

• The Four Year Plan announced that a site value tax is being introduced in order to broaden the tax base. As an interim measure, while site valuations are being conducted, every house regardless of value, size or proximity to local services will be charged approximately €100 per annum. The Plan indicates that by 2013 the valuations will be completed and each household, depending on its site value, will be levied a site value tax.  

Income Tax

Reform of the Income Tax system has commenced in this Budget, with the following measures:

• abolition of the Income Levy and Health Levy and the introduction of a single Universal Social Charge;
• income tax bands and credits reduced back to 2006 levels;
• abolition of the employee PRSI contribution ceiling and an increase in PRSI rates for the self employed and certain public servants;
• restrictions on reliefs associated with private pensions; and
• restrictions on the use of certain property based tax reliefs that high earners used to shelter their income.  

Indirect Taxes & Excise Duties

The standard rate of VAT (currently 21%) is to be increased to 22% in 2013 and 23% in 2014. Irish businesses for years have suffered the migration of shoppers over the border to Northern Ireland to purchase products. This activity was encouraged due to the fact that the UK had a VAT rate of 17.5% and the Euro had appreciated significantly against Sterling. The UK Exchequer is raising its VAT to 20% from January 2011 and the Euro is weakening against Sterling. These factors act as a disincentive for Irish citizens to purchase goods in the United Kingdom.

Cut in Public Sector Pay and Pensions

• Taoiseach’s (Prime Minister) salary to be reduced by over €14,000 per annum and Ministers’ salaries to be reduced by over €10,000 per annum.  
• It is intended that a maximum salary rate of €250,000 will apply to the public sector including State agencies.   
• A cap on the next President of Ireland’s salary to €250,000.
• A 4% reduction will apply to public sector pensions above €12,000 a year.