An American Chamber of Commerce survey has found that almost 40 per cent of the leadership of multinationals in Ireland see the current personal tax regime as a barrier to growth.
“This is likely to become more of a live issue in the post-pandemic world given the surge in remote working possibilities and a global workforce that is more mobile than ever,” says Sonya Manzor, head of William Fry Tax Advisors. “Personal tax considerations will be one of a number of key factors that individuals will take into account when weighing up the potential of relocating to Ireland.”
Ireland needs to consider how best to make itself more competitive on an overall basis in the post-BEPS era (base erosion and profit shifting), particularly given that many multinationals will not be in a position to avail of Ireland’s 12.5 per cent corporation tax rate in the longer term, she adds. “The overall personal tax regime will play an important role in this regard.”
The new era requires substance, says EY tax partner Michael Rooney. “In the past we always tended to focus on the corporate tax rate and didn’t look at the personal tax rate. Now we have the BEPS rules, and we need substance here in Ireland. Companies need to have the right people on the ground and the Irish personal tax rate is not competitive.
“At a high level it doesn’t seem misaligned or out of kilter with countries like France, Benelux or the Nordics. However, individuals in those countries can get things like generous child tax allowances and wide bands between the rates.”
That does present a challenge, according to KPMG tax partner Anna Scally: “The Irish marginal personal tax rate is 52 per cent. That is objectively high when compared to other jurisdictions. Equally as important as the rate are the tax bands and the point at which start to pay tax at the higher rate. Employers ask what the marginal rate is, and the average rate paid by employees.”
PwC tax partner Doone O’Doherty explains how that 52 per cent rate is made up. “It is 40 per cent income tax, 8 per cent USC, and 4 per cent PRSI,” she says. But that is not necessarily very high.
“If you look at the 38 countries in the OECD we don’t even make the top 10 of the countries with the highest marginal tax rates, we are 13th,” she says. “Our rate is actually below that of Belgium, Finland, Portugal, France, Denmark, Austria, Greece, Italy and Sweden. When it comes to employers and employee PRSI we have one of the lowest combined rates in the EU. From a rate perspective we are markedly lower than many others in Europe.
“The main issue is the point where the rates kick in. In Ireland it’s €33,500 for an individual and €44,300 for a single income couple. The individual band was increased by €1,500 in the last budget but that was to keep pace with inflation rather than to make Ireland more competitive. In the UK it’s £50,000 (€58,500) for the 40 per cent rate and £150,000 (€175,600) for the 45 per cent rate. In Germany you have to earn more than €58,000 before you hit the 42 per cent rate and €274,000 before you pay at the top rate of 45 per cent.”
Tax abatement
The Special Assignee Relief Programme (SARP) has helped. This reduces the effective tax rate paid by employees of multinational firms who are working here on secondment or on limited term transfers.
“It reduces the delta between overseas rates and Irish rates,” says Rooney. “It only kicks in for salaries above €75,000 but you can get a 30 per cent tax abatement up to €1 million. It doesn’t apply to USC or PRSI.”
It doesn’t apply to new hires coming in from abroad, however. “If there was a way to apply SARP to new hires as well that would give companies greater access to talent and add more people to the tax base here,” Rooney notes. “It would make Ireland much more attractive for overseas talent.”
Other restrictions should be eased as well, according to Manzor. “At present, an employee must have a minimum base salary of €75,000 per annum to qualify for SARP. This minimum amount cannot include share options, benefits in kind or bonuses, which seems unduly restrictive.
“This is an area that should be reviewed so as to ensure that a wider population of employees are in a position to benefit from the relief. The regime should be benchmarked against other similar regimes in competitor jurisdictions and should be kept under constant review as a key element of Ireland’s offering to incentivise foreign direct investment.”