Against a backdrop of growing international admiration for the manner in which Ireland Inc is working through its present economic difficulties, the largest Finance Bill in over a decade was published on 8 February 2012. The bill details the draft legislation intended to give effect to the pro-business announcements made in the December Budget. This article considers four of the initiatives targeted to stimulate the domestic economy:

• Research and development
• Special Assignment Relief Programme
• Foreign Earnings Deduction and
• Financial Services

A high level overview of the other more interesting draft provisions is also set out.

Research and Development

A number of positive changes to enhance the R&D tax credit regime are proposed in the bill. These proposed measures should have particular attraction for the SME sector, as well as playing an important role in attracting and retaining key R&D people.

It is proposed that a company engaged in qualifying R&D activity should be able to claim the initial €100,000 of its qualifying costs without reference to the base year threshold. This welcomed announcement introduces a limited volume based approach for the purposes of calculating the tax credit. Under the proposed change, companies engaged in R&D activities and claiming the R&D credit should have up to €25,000 per annum of an additional tax credit.

In an innovative move, the Minister is proposing to enable companies in receipt of the R&D credit, in certain instances, to reward key employees. This would effectively enable key employees to receive part of their remuneration on a tax free basis. The company has the option of determining which employee(s) will receive the benefit. The effective rate of tax payable by the employee(s) cannot be reduced below 23%. Unused tax credits allocated to the employee(s) can be carried forward indefinitely. The chosen employee(s) must submit a refund claim to Revenue.

The term “key” employee has been narrowly drafted to include:

• The employee must not be, or have been, a director of the company and he / she must not be connected with a director of the company;
• The employee must not hold, or have held, a material interest in the company. In addition he / she must not be connected with a person who has a material interest in the company;
• 75% of the employee's work activities must be undertaken “in the conception or creation of new knowledge, products, processes, methods and systems” and
• 75% of the employee's emoluments must qualify for the R&D tax credit.

A material interest for the purpose of the provision means a beneficial ownership of or ability to control, directly or indirectly, more than 5% of the ordinary share capital of the company.

Improvements to the subcontracting provisions are also proposed. These should be of particular interest and benefit to SME's. Currently, sub-contracted R&D costs are permissible to the extent that they do not exceed 10% of the total R&D costs, or 5% where sub-contracting is to a third level institution. It is proposed to increase this limit to the higher of 10% / 5% (as appropriate) or €100,000.

The bill also proposes to facilitate the transfer of R&D tax credits in the context of a group reorganisation. In certain circumstances, where a trade is transferred between two group companies, the transferee may claim any R&D tax credits not previously utilised by the transferor.

Other amendments are also proposed in relation to the continuing eligibility of buildings for R&D purposes following the transfer of a trade and the requirement for EU Member State R&D grants to be deducted from eligible expenditure.

Special Assignment Relief Programme (SARP)

As a stimulus for employment creation and to enable Ireland to attract high calibre human capital, the bill proposes a new expatriate regime. The current SARP is to be abolished and the SARP proposed in the bill will be effective from 1 January 2012.

The relief will operate by exempting from income tax 30% of the individual's employment earnings between €75,000 and €500,000. In essence, the maximum tax deduction will be €127,500 (i.e. €425,000 x 30%). The relevant employee must be assigned to work in Ireland from a DTA country and arrive for work in Ireland in any of the 2012, 2013 or 2014 tax years. It is necessary for the employee to perform substantially all of the duties of their employment in Ireland for a minimum period of 12 months. Subject to certain conditions, the relief will apply for the first 5 years of the individual's residence in Ireland. The employee must have been employed on a full time basis by an associate employer (outside Ireland) for a period of at least 12 months immediately prior to relocating to Ireland.

The employee must not have been tax resident in Ireland for the 5 years preceding the year of arrival. However, it would appear that an individual is not prevented from qualifying for the relief if they have worked in Ireland prior to the 12 months immediately before arriving in Ireland. This is subject to the assumption that they have did not become Irish tax resident. This is a welcomed change, as under the old SARP all employees who had worked in Ireland at some juncture were precluded from the regime.

Employees qualifying for the proposed new relief can recover the cost of one return family trip to their home country from their employer tax free. School fees of up to €5,000 per child can be paid tax free by the employer.

The relief must be claimed by the employee. However, it is necessary for the employer to certify that certain conditions have been satisfied.

It is hoped that the proposed legislation it will be enhanced before its enactment. In order to improve Ireland's competitive advantage, consideration should be given to extending the relief to encapsulate the Universal Social Charge. Consideration should also be given to reducing the minimum base salary amount of €75,000. This would be in the context that certain multinationals have a skills shortage, are unable to source staff in Ireland, but the salaries on offer would not be in the €75,000 plus range. Additionally, the proposed legislation does not account for the possibility of “new hires”. As noted above, the proposed new SARP will only apply to employees arriving in Ireland in the 2012, 2013 or 2014 tax years. This would suggest that employees who are currently availing of relief under the old SARP may not qualify under the proposed new provisions. It is hoped that the position will be clarified shortly.

Foreign Earnings Deduction (FED)

In an endeavour to maximise business opportunities, the Budget announced a proposed a new relief aimed at employees working in Brazil, Russia, India, China and South Africa (“BRICS”). The relief will be calculated on the ratio of qualifying days spent in these jurisdictions by reference to the total number of days in the tax year. The ratio will be applied to income earned from employment in the tax year.

Effective from 1 January 2012, the bill proposes that relief should be available to Irish resident individuals where foreign work days exceed 60 days in a 12 month period. A qualifying day is one of a block of 10 or more consecutive days throughout which the individual was working wholly abroad. The relief is limited to a maximum deduction of €35,000 per annum. The deduction will operate for the 2012, 2013 and 2014 tax years.

The FED does not apply to remuneration in the form of benefit in kind. Share based remuneration and share options are however included.

It is recognised that a key driver in the growth of Irish businesses will be the ability to develop foreign markets. While the proposed relief for undertaking business in the BRICS's countries is to be welcomed, it is unfortunate that other emerging markets have not been recognised. The scope of the proposed legislation should be expanded to include jurisdictions such as the Middle East and Singapore. In essence, this would be a return to the FED which was abolished in 2003.

The proposed legislation is limiting in that it does not recognise that employees in exercising their duties in BRICS countries may also have to work in other neighbouring jurisdictions. For example, John has recently worked outside Ireland for 12 consecutive days. Eight of these days were in Brazil, the other four in Argentina. None of this period would qualify under the proposed FED legislation. This is irrespective of the fact that the duties performed in Argentina may have been ancillary to the tasks undertaken in Brazil.

Financial Services

In his December Budget speech, the Minister reaffirmed the Government's commitment to the International Financial Services sector. This sector currently employs more than 30,000 people and contributes over €1 billion in tax revenues to the Exchequer. The Government's commitment to the sector was reaffirmed by 21 proposed new measures. These measures will apply to the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry.

A selection of some of the key proposed provisions are:

• At present, interest deductibility is confined to payments made to jurisdictions with which Ireland has a tax treaty. The bill proposes allowing a deduction for interest payments to group companies in non-treaty jurisdictions to the extent that the jurisdiction levies a tax on such interest. In effect, if the tax rate charged by the foreign jurisdiction on the interest income is in excess of 12.5%, the Irish entity should be entitled to claim a full deduction for the interest payment. In the event that the foreign jurisdiction exempts foreign interest income, no relief will be available in Ireland for the interest payment.
• The bill provides for unilateral relief for foreign tax suffered on equipment leasing rental income. The relief should permit companies undertaking an equipment leasing trade to take a credit against their Irish corporation tax liability for any foreign tax suffered on the rental income. Provision is also made for the “pooling” of qualifying foreign tax credits. This arrangement will enable excess foreign tax on one source of qualifying rental income to be offset against another source of qualifying lease income. These provisions are effective from 1 January 2012.
• New provisions will enable the Revenue Commissioners to make regulations requiring the periodic reporting of specific information by Irish funds. The information to be reported will identify certain classes of unit holders, tax reference numbers and value of units held. These provisions are effective from 1 January 2012.
• Legislative provisions were introduced in 2010 to enable companies providing certain types of Shari'a compliant finance to be taxed in a manner equivalent to conventional financing transactions. The current provisions only permit a finance company or a sukuk (Islamic bond) issue to elect into the regime. The bill proposes that either party to the transaction can elect to enter the regime. The definition of financing company has also been broadened.
• The bill contains nine separate technical stamp duty amendments which extend the range and scope of stamp duty exemptions applying to certain financial transactions and confirm the stamp duty treatment of options over shares.

Other Provisions

The computational rules for providing relief for foreign tax suffered on royalty payments from abroad are to be amended. The measure is intended to assist, in particular, the software sector. The changes provide for a form of pooling of tax deductions. The bill provides that any foreign tax suffered on royalty payments, to the extent that it cannot be used due to insufficiency of income, can be used to reduce other foreign source royalty income which is taxed as trading income. This treatment applies in respect of accounting periods ending on or after 1 January 2012.

The bill extends the availability of the 12.5 % rate to include dividends received from companies which are resident in jurisdictions with which Ireland has ratified the OECD Convention on Mutual Assistance on Tax Matters. This would include jurisdictions such as Brazil, a country with which Ireland has not yet negotiated a treaty. This change is effective from 1 January 2012.

The current corporation tax group relief provision requires all members of the loss group to be resident in Ireland, an EU or an EEA member state. The bill extends the scope of the companies which can become members of the loss group. Companies which are tax resident in a treaty jurisdiction, and any company (together with its subsidiaries) the principal class of shares of which are regularly traded on a recognised stock exchange can now be included within the loss group. This amendment will apply to companies with accounting periods ending on or after 1 January 2012. Provision is made for accounting periods which straddle this date.

Bread is subject to VAT at the zero rate. The technical definition of “bread” is narrow for VAT purposes. Last November, Revenue indicated that they intended to apply a stricter interpretation of this definition. The broadening of the definition in the bill to include certain products which are commonly accepted as being bread is to be welcomed.

Conclusion

Acknowledging the country's financial position, the Government has indicated that it has endeavoured to best employ funds in areas with the maximum employment potential and highest probable return on public monies. On balance, the bill continues the pro-business theme with a key focus on bolstering employment and developing the Irish innovation community. The proposed SARP and R&D provisions are interesting. However, it is hoped that the scope of the proposed legislation will be extended prior to its enactment, thereby making the provisions more commercially attractive and employer in-tuned.

Cormac Kelleher is a Corporate Tax Manager with Mazars

Email: ckelleher@mazars.ie