Getting Ireland Brexit ready

Getting Ireland Brexit ready

How will Budget 2017 affect Ireland's preparations for Brexit? Read about the effect on customs duties, tourism and hospitality.

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Following the Government’s first assessment in the Summer Economic Statement of the short-term macroeconomic implications of Brexit, the Department of Finance issued a paper with the Budget titled “Getting Ireland Brexit Ready”. The paper provides a sectoral analysis of the impact of Brexit and an overview of the policy responses that have been included in the Budget to enable exposed sectors to remain competitive and protect the public finances from Brexit-related shocks.

The paper acknowledges that with around 16% of all exports going to the UK and a similar share of imports depending on the UK, the Brexit decision is expected to have a material negative impact on the Irish economy, and has been a factor in lowering our economic growth forecasts for next year. That said, the severity of the impact is acknowledged to be difficult to gauge at this stage as the terms under which the UK will leave the EU are not yet clear.

Given the significance of the issue for Ireland, a new Government cabinet committee has been established, and a new Second Secretary General has been appointed in the Department of the Taoiseach to look after the integration of international, EU and Northern Ireland functions there.

Recognising the uncertain environment, the Government has also announced a number of taxation measures in Budget 2017 to get Ireland “Brexit ready”. These changes (which are discussed in detail elsewhere in Taxing Times) are in the areas of:

  • Small and medium enterprises (SMEs)
  • Irish exporters 
  • Entrepreneurship
  • The agri-food sector 

The commitment to establish a “rainy day fund” and a new lower debt to GDP target (a ratio of 45% to be achieved by the mid-2020s) are also influenced by concerns around the impact of Brexit.

Customs duties

The final shape of Brexit will determine whether there are customs duties to be paid on imports, whether there are restrictions on certain goods and services, and whether the customs procedures are relatively simple or more complex. In order to prepare for such changes, the Revenue Commissioners are reviewing the customs procedures in order to scope out the potential problems and identify possible means of minimising the cost for business and maximising the facilitation of trade. For the moment it is not possible to resolve the issues but merely to seek to scope them and be adequately resourced to respond to the problems that may emerge over the next few years.

Sectoral exposures

In light of Ireland’s close trade and financial links with the UK, the paper states that the pass-through of any losses from the UK economy to Ireland (or indeed from any third country trading partners that are themselves impacted by Brexit) are likely to be material but can be mitigated by carefully targeted measures. The sectors identified by the Government as being highly exposed to and reliant on trade with the UK include:

  • Food and beverage
  • Electrical equipment
  • Materials manufacturing
  • Traditional manufacturing 

All of these share a number of common features:

  • Relatively high levels of exports to the UK
  • High levels of imported intermediate goods coming from the UK which are used in the production process (with the exception of the food and beverage sector) 
  • Relatively high volume/low value products, which would be significantly affected by the introduction of Trade Tariffs 
  • Significant employers outside the Dublin region, with the border region the most exposed relative to others
  • High local economy multiplier ranging from 1.2 (electrical equipment) to 1.5 (food and beverage)
  • Significant number of SMEs with a high share of indigenous ownership

Tourism & Hospitality

Whilst the Services Sectors in general would not be affected by trade tariffs to the same extent as manufacturers, certain services sectors such as Tourism and Hospitality are significantly exposed to the Euro-Sterling exchange rate and this sector is also seen as a Brexit-exposed sector within the economy.

Sectoral Tax Policy Reponses

The specific tax policy responses identified by the Government and included in the Budget to assist the exposed sectors in remaining competitive and to trade in diversified markets are:

  • Reduced capital gains tax to help entrepreneurs 
  • An extension and amendment of the Foreign Earnings Deduction to help Irish exporters to diversify their export and import markets 
  • An extension of the Special Assignee Relief Programme to assist businesses to relocate key staff to Ireland
  • An increase to the Earned Income Tax Credit for selfemployed taxpayers to encourage entrepreneurship 
  • The introduction of an income averaging “step-out” in the agriculture sector to help with expected volatility in demand for agri-food products following severe price fluctuations, 
  • The retention of the 9% VAT rate to help the tourism and hospitality sector to maintain competitiveness in light of recent currency movements 
  • A €150m loan fund for farmers to improve cash flow management and reduce costs of short term borrowings 
  • A proposed review in 2017 of the application of the 1% stamp duty to Irish stocks and marketable securities 

Each of the above Budget measures are outlined in further detail in this publication. 

FDI Sectors

The Government’s paper acknowledges that Pharmaceutical Manufacturing, and Financial and ICT services sectors, which tend to have high foreign ownership, also have significant export relationships with the UK. The paper indicates that the following are key policy measures to assist the FDI sector to continue to attract jobs to Ireland:

  • The ongoing commitment to the 12.5% corporation tax rate 
  • The R&D Tax Credit regime 
  • The Knowledge Development Box regime 
  • The extension of the SARP regime

Whilst acknowledging that the decision to invest into Ireland will be driven by a number of factors, not just taxation, the paper acknowledges that the Government will need to respond to any changes made by the UK to strengthen their overall tax offering, so that Ireland can continue to be relatively attractive compared to the UK from an overall taxation point of view.

The Department of Finance’s paper provides some interesting insights on the sectoral impact that Brexit may have on the Irish economy and it is helpful to have an overview of the policy responses in Budget 2017. Undoubtedly further responses will be needed when more details emerge on the terms on which Brexit will take place. It will also be very helpful to have similar policy responses emerge from other parts of Government and the Financial Regulator in order to ensure that appropriate actions are taken to minimise the adverse impact of Brexit whilst also taking advantage of whatever opportunities may emerge.

Taxing Times: Budget 2017 & Current Tax Developments

Taxing Times: Budget 2017 & Current Tax Developments

Budget 2017 is the second budget in a row where the choices have been about how to distribute benefits; read our professional tax analysis.

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