Speech by Minister McGrath to the Irish Tax Institute Annual Dinner

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I am delighted to be here this evening and would like to begin by thanking the Irish Tax Institute, and in particular, its President Tom Reynolds and Chief Executive Martin Lambe, for the invitation to be with you and the chance to say a few words.

It gives me the opportunity to recognise the advocacy work that the Institute does on behalf of its members, and the valuable input it provides to Government when taxation issues are being considered.

I want to acknowledge Chairman Niall Cody and Commissioner Ruth Kennedy from the Revenue Commissioners who are with us and who play such a vital role in our tax system. I also want to acknowledge my Oireachtas colleagues who are in attendance – Deputies Cormac Devlin and Damien English and Senator Malcolm Byrne, and also my colleagues in the Department of Finance – Deirdre Donaghy and Gary Hynds who head up the Business and International Tax sections.

Before speaking about tax matters I’ll say a few words about the economy and the public finances. The overall message is that – despite all the challenges and headwinds internationally - Ireland is in good shape.

Our economy has demonstrated remarkable resilience in the face of successive shocks in recent years. There is no doubt but that global economic conditions remain challenging and many of you who trade internationally are experiencing this. As a small, open economy, we are not immune from the effects of that backdrop.

Conflict around the world, geopolitical tensions, the monetary policy response to inflation – all of these are acting as a drag on the economy. Despite this, we expect the Irish economy will grow this year, measured by either GDP or Modified Domestic Demand.

More people are working than ever before. The Labour Force Survey published yesterday shows that we have over 2.7 million in employment in Ireland now – up by 90,000 in a year. Not only have we regained the hundreds of thousands of jobs lost during COVID, we actually have 329,000 more people at work today than immediately before the pandemic at the end of 2019 – that’s the equivalent of four full Croke Parks, which is an achievement we should be proud of.

Inflation is now moderating pretty quickly after hitting a 40 year high in 2022. It peaked at almost 10% but we are moving now towards the target rate of 2%. We are running a general government surplus of around 3% of national income each year, and expect a further surplus of approximately €8 billion this year.

The National Debt report published this week showed we are making good progress. Gross debt has fallen and debt as a share of national income has declined from over 160% in 2012 to 76% now. When you consider the €40 billion in cash and other liquid assets and holdings in the Ireland Strategic Investment Fund, our ratio is under 60%.

Our credit rating has improved steadily and we are now able to borrow at yields comparable to, or even less than, core Eurozone countries such as France, Belgium, Finland and the Netherlands.

Last year, we collected almost €24 billion in corporation tax receipts. While these receipts are extremely welcome, it is a key priority that we do not create permanent fiscal obligations based on revenues that could prove transitory. That is why I am setting up two new funds using some of the windfall corporate tax receipts we are currently enjoying.

The first fund I am establishing is the Future Ireland Fund, this will take a long term investment approach. We will contribute 0.8% of GDP annually out to 2035 and the Fund has the potential to reach €100 billion over the next 10 years. This is the correct and prudent thing to do against the backdrop of the current strong position of the public finances and will help us to meet the cost of demographic change, and the digital and green transitions.

The second fund I am setting up is an Infrastructure, Climate and Nature Fund, which will ensure that we never again have a boom, bust approach to public capital investment. In practical terms, it means that the next time we encounter an economic shock or experience a downturn, we will have the resources to maintain a high level of public capital investment, and over €3 billion out of a fund size of €14 billion will be specifically available for projects that help meet our climate targets.

I intend to be bring the legislation to underpin these Funds to cabinet next month and introduce it in the Oireachtas in the weeks after that.

This is perhaps the first time a Minister has attended this event following a truly once-in-a-generation change to our tax system. I had the honour of bringing forward the necessary legislative provisions for Pillar Two in last year’s Finance Act.

It was an extremely complex Bill, running to some 310 pages and has fundamentally changed the corporation tax landscape for our largest companies, and marks the start of a new, globally-coordinated, minimum effective tax rate.

Ireland entered into the OECD Two-Pillar Agreement in October 2021 with the view that an agreed, multi-lateral solution to the challenges of an increasingly digitalised and globalised society would provide much-needed certainty to businesses, following almost a decade of intense debate on global taxation.

Engagement with stakeholders has been a critical element of the legislative development process. The extensive feedback received, including I know from the Irish Tax Institute and its members, was invaluable. I wish to thank everyone who engaged with the consultation process; your input is very much appreciated. I am also aware that we are far from the end of the work required to implement Pillar Two. The businesses and the advisory firms that you represent are now very much at the coal face, working with in-scope companies to apply these complex new rules in practice.

There will continue to be extensive engagement with Revenue and Finance officials throughout this process, and I would like to acknowledge in particular my own officials and the Revenue team who worked on the drafting of the Pillar Two legislation – amounting to almost half the text of the autumn Finance Act, which resulted in it being the largest Finance Act in a decade.

Work is continuing at OECD working groups on important elements of the interpretation and administration of the Pillar Two rules. Negotiations also continue on Pillar One, including Amount A which will provide for the reallocation of certain excess profits to market jurisdictions with respect to large and very profitable multinational enterprises and Amount B to provide a simplified approach to transfer pricing rules, with a particular focus on low-capacity jurisdictions.

We know that this agreement has been challenging and will come at a cost to Ireland in terms of reduced tax receipts. However, the alternative to an agreement could see the introduction of digital taxes and escalating global trade tensions, which would be in no-one’s interests.

We remain hopeful that the remaining issues can be resolved. As a small open economy, these reforms are critically important to our economic model. The objective of Government is always to ensure that Ireland remains best in class as a location for Multinational Enterprises when they look for new opportunities to expand, grow and innovate.

During my recent engagements with the FDI sector I made it clear to stakeholders that our tax system will continue to be a cornerstone of the supports we offer for business investment and economic activity in Ireland. Implementation of Pillar Two also provided a welcome opportunity to enhance supports for companies engaged in Research & Development activities.

In Budget 2024 I provided for an increase in the R&D tax credit from 25 per cent to 30 per cent. For companies in scope of Pillar Two this will maintain the current net level of support delivered by the credit, and for smaller companies – representing over 85% of the claimants of the credit each year – this is a real and tangible increase in government support. It is my hope that this will encourage more companies, particularly smaller companies and those undertaking smaller R&D projects, to engage with the regime going forward.

As I committed to you here last year, I have been engaged in an active process of reviewing the supports available to businesses, to ensure that current incentives are effective and to provide for the development of new measures where warranted. Sourcing seed and expansion capital is a critical challenge faced by businesses. To help address these challenges, in Budget 2024 I enhanced the Employment Investment Incentive scheme and I also announced a new, targeted Capital Gains Tax relief for Angel Investors in innovative, start-up SMEs. The relief, which will be commenced this year, will allow angel investors to benefit from a reduced rate of Capital Gains Tax of 16%, and in turn will assist SMEs in attracting investment.

To support our vibrant creative sector, I have provided for an increase in the film tax credit project cap from €70 million to €125 million, subject to State aid approval. I visited all the main production studios in LA in January and it left me in no doubt that this change will result in a lot of investment and activity in the creative sector in Ireland.

I also modified the Tax Credit for Digital Games to ensure that it is compliant with Pillar Two rules and announced that a new tax credit for unscripted productions will be developed this year.

There are several other projects and initiatives also now under way in my department, all aimed at providing a more supportive environment to do business in Ireland.

Earlier this month I announced significant changes to the Tax Debt Warehousing scheme with a reduction in the interest rate applying to warehoused tax debt to 0%. Revenue also confirmed additional flexibilities in working with customers in relation to warehoused debt.

Work is actively progressing on the development of a participation exemption for foreign dividends, in line with the commitments in the Roadmap published last September. This has been a long-standing request of businesses and, following the introduction of both the ATAD and Pillar Two measures, it has the potential to provide for some much-needed simplification to tax calculations.

Legislation is being developed with a view to its introduction in this autumn’s Finance Bill, and stakeholders will have the opportunity to provide input through Feedback Statements as the development progresses, the first of which I am aiming to publish within the next six weeks.

Policy consideration of the potential for a foreign branch exemption is also taking place this year, and I know that my officials are considering all the input received to the recent public consultation.

On the subject of simplification more generally, I acknowledged in my Budget speech last year that the business community have expressed concerns around the complexity of rules and requirements for certain tax reliefs, noting that this can create a barrier for businesses seeking to access certain supports.

At my request, a Taxes Administration Liaison Committee sub-group on Business Support Schemes has been established to examine the underlying rationale for processes or conditions in relevant tax reliefs. It has a mandate to identify by mid-year any administrative changes that can feasibly be implemented within Revenue to improve access to reliefs while still minimising risk. Any proposals that would require legislative change will be brought to the attention of my officials, for consideration in the normal Finance Bill process.

It is important also to remember the significance of PAYE taxpayers in our economy, and to recognise that a perception of complexity can discourage individuals from claiming tax reliefs to which they are entitled.

Last month, in conjunction with the Revenue Commissioners, I launched an extensive information campaign to raise awareness among PAYE taxpayers of the tax credits and reliefs available and how they may be claimed.

I understand that over 250,000 additional PAYE income tax returns for the year 2023 have been received since the launch of the campaign. Of the over 800,000 PAYE tax returns filed for 2023 to date, almost 547,000 filings have resulted in an overpayment of tax and, as a result, €410 million has been refunded to PAYE taxpayers.

In terms of income tax generally, taxpayers are now seeing the benefit of a €1.3 billion income tax package and the first reduction in USC rates in 5 years. I recognise the importance of having a competitive income tax system and I’m committed to introducing a further substantial income tax package in the autumn budget.

A further area identified as having potential for simplification is Ireland’s tax provisions for interest. The introduction of the ATAD interest limitation ratio in Finance Act 2021 added significant additional restrictions in this area, and I am of the view that it is timely now to undertake a review the interest regime as a whole.

The review will commence this year. As this is a complex area, it will require a significant body of work over potentially a multi-year timeframe and I look forward to engaging with stakeholders on this matter in due course.

A comprehensive review of share-based remuneration is also now underway, reflecting the growing popularity of, and participation in, such incentives. It will be informed by the responses to the recently closed public consultation, and will include an examination of the current administrative and legislative underpinning of Irish Share Schemes.

And finally, I’m sure many of you will be aware that a review of the Irish funds sector is currently under way in my department. The review looks ahead to 2030 and includes consideration of the taxation regime for the various types of funds in the context of the underlying financial services policy rationale for each vehicle.

A public consultation was carried out last year that received over 190 submissions – and I know that a number of you will have contributed to these responses. The review team will report to me later this year in time for consideration of measures for the Budget in the Autumn.

To conclude, we are here tonight to recognise and reflect on the truly extraordinary year that 2023 was in the tax world. We have seen fundamental changes to our tax regime that will take a number of years to fully bed in, and at the same time we have commenced a process of reviewing and refreshing our full range of business supports.

I am convinced that our prospects have never been brighter. Since the beginning of the year, I’ve met dozens of senior executives in the West Coast of the US and at the World Economic Forum in Davos, and the overall takeaway is how positively Ireland is viewed as a place to invest and do business in.

The strengths for which we are admired are clear - the talent of our workforce, the quality of our education system and how it interacts with industry, our place at the heart of Europe, the stability of our political system, English speaking, common law jurisdiction, predictable tax policy. The increasingly diverse nature of our workforce – with almost one in five of those working in Ireland not having been born here – is a great asset. Overall, we are seen a trusted and reliable partner, that honours commitments and gets things done.

In many ways, the more uncertain the world becomes, the more attractive Ireland is to investors. In IDA Ireland and Enterprise Ireland, we have world leading bodies working to attract investment to Ireland and win new markets abroad for Irish businesses. We are striking the right balance right between winning and retain FDI, and ensuring that Ireland is an attractive country to start and scale a business.

Ireland has a bright future and I know you will all play your part in ensuring we maximise our potential.

I wish you all a very enjoyable evening.