Income Tax

Film Relief

The Bill contains provisions to improve relief for investment in film production. Specifically, the percentage of expenditure that is eligible for tax relief is being raised to 80% for all films, up from the existing levels of 55% or 66% (depending on the film budget). In addition, the ceiling on qualifying expenditure for any one film is being increased from €15 million to €35 million. These substantially improved terms will need European Commission approval and will come into effect by way of a commencement order.

Tax Relief on Household Waste Charges

To take account of the introduction of the Pay by Use principle for Local Authority Waste Charges, the tax relief provisions in respect of service charges are being revised. The Bill provides for a general upper limit of €400 per annum on which relief can be claimed irrespective of how the charge is determined. At the standard rate of tax this is equivalent to a tax credit of €80. Currently, the relief, which is granted by reference to the amount paid in the financial year immediately preceding the tax year, is limited to €195 where the tag (bin) system is in operation and there is no limit where the householder pays a fixed annual charge. This change is effective from 1 January 2006 in respect of charges paid in the financial year ended 31 December 2005. A transitional arrangement will apply in respect of those taxpayers who will have paid fixed charges in excess of €400 during 2005. In all cases the maximum ceiling of €400 will apply for 2007 onwards.

Certain Capital Allowances & Tax Expenditure Items

Mortgage Interest Relief - Landlord registration requirement

Eligibility for mortgage-interest relief on rental properties is being linked to registration of landlords with the Private Residential Tenancies Board (PRTB). Landlords are, in general, legally required to register tenancies with the PRTB, and it is envisaged that this linkage will improve registration compliance rates.

Certain changes in relation to private hospitals and sports injuries clinics

At present, private hospitals and sports injuries clinics are subject to annual certification for 7 years by the Health Services Executive to ensure that the conditions of the tax relief scheme are satisfied. The 7-year certification period is being extended to match the relevant clawback period applying to the facility (i.e. 10 years for private hospitals commencing in use up to 31 July 2006, 15 years for private hospitals commencing in use after that date, and 10 years for sports injuries clinics). In addition, in line with the recommendations of a recent consultancy report, beneficiaries of the tax reliefs for private hospitals will be required to provide information that will facilitate the gathering of data about the Exchequer costs of the reliefs. The information will relate to construction costs, the number and nature of investors, the amount to be invested by each investor, and the type of investment structures being put in place. This provision will apply to private hospitals (including private psychiatric hospitals), which are subject to annual certification by the Health Service Executive (HSE). Some amendments to the definition of ‘qualifying hospital’ are being made, to take account of recent changes in health secondary legislation.

Clawback on ‘Change of Use’ of Private Hospitals and other facilities

Under the existing rules, the clawback provisions for private hospitals, private nursing homes and childcare facilities take effect if the facility is sold, destroyed, or if it “ceases altogether to be used.” However, if the facility continues to be used for a different purpose – which may be completely unrelated to healthcare or childcare provision – there is no clawback of the relief. This potential loophole is being closed off in the Finance Bill in respect of all such facilities commencing in use after 1 January 2006. However, ‘changes of use’ from one such facility to another – e.g. from an “associated residential unit” to a “convalescent facility” – will be permitted.

Patent income exemption review

The Bill contains two measures to prevent abuses of the patent income exemption. One measure aims to prevent the avoidance of income tax by the re-categorisation of franchise licence fees as patent royalty payment. Another provision strengthens the existing anti-abuse measure limiting the amount of exempt patent royalty distributions that may be made by a company to the aggregate of its R & D spend over a three year period. As is normal with tax anti-avoidance measures, these will apply as and from the date of publication of the Finance Bill (i.e. 2 February 2006).

Termination Date for Shipping Losses

Section 407 of the Taxes Consolidation Act 1997 provides, subject to certain exceptions, that losses and capital allowances arising out of a shipping trade are ringfenced and are not available for offset in taxing profits of any trade other than a qualifying shipping trade.The termination date for this provision is 31 December 2006 and this is now being extended by 4 years to 31 December 2010.

Corporation Tax

R&D tax credit

The tax credit for R&D was introduced in the 2004 Finance Act. A number of issues have arisen since its introduction and these are addressed in the Bill by making the following changes:

1. Revenue will be empowered to seek expert scientific advice to enable the R&D claim for tax relief to be properly assessed.
2. Where plant and machinery is included in the incremental spending calculation, but is in dual use (R&D and production) there will be a proportionate allocation of the expenditure for the purposes of the credit, so as to confine it to the R&D portion, with subsequent adjustments where necessary.

Mergers Directive

The 2005 EU Mergers Directive amends the 1990 EU Mergers Directive which provides for tax deferral in the case of cross-border mergers and divisions of companies, transfers of assets and exchanges of shares. This means that whenever such a transaction takes place involving companies from different Member States, the transaction would not trigger a charge. The Bill gives effect to this 2005 EU Directive which broadens the scope of the original reliefs.

Tonnage tax

Tonnage tax was introduced in Ireland in 2002 for the shipping industry. The regime provides for an alternative method of taxing shipping profits. The tax regime was reviewed in 2005 and the review has brought to light some areas where the legislation could be improved. The Bill contains provisions to implement the recommendations arising from the review, such as changes to the definition of qualifying ships.

Non-commercial State-Sponsored bodies

The Bill adds the following bodies to Schedule 4 which provides for exemption from certain taxes pursuant to section 227 of the Taxes Consolidation Act (TCA) for non commercial State-sponsored bodies:

• The Courts Service
• The Health Services Executive
• The Irish Auditing & Accounting Supervisory Authority (IAASA)
• National Tourism Development Authority

Close company surcharge – technical provision

Section 434(5)(b) of the TCA 1997 contains rules governing the computation of a surcharge on undistributed trading income of certain close companies. The current rules allow for the under-calculation of trading income in certain circumstances, and therefore the surcharge may be too low. The Bill contains a provision rectifying this.

IFRS (International Financial Reporting Standards)

The Finance Act 2005 introduced changes to deal with the implementation of the new International Financial Reporting Standards (IFRS). The Bill includes a number of minor additional amendments in this area.

UITF (Urgent Issues Task Force)

UITF 40 is a guidance note issued by the Urgent Issues Task Force of the Accounting Standards Board. It deals with the question of accounting for income from contracts to provide services. A measure is included in the Bill to ensure that, in certain cases involving a change in the basis of valuation of work-in-progress, there will be no taxfree uplift as a result of the change.

Pensions

Pensions and SSIAs

To incentivise the transfer of SSIAs funds on maturity into pension accounts on a once-off basis, the Bill provides that the Exchequer will pay a bonus directly into the pension account of €1 for every €3 transferred, up to a maximum bonus of €2,500. In addition, the exit tax on cashing one's SSIA on maturity will be refunded in proportion to the amount of SSIA transferred into the pension account.

The bonus/exit tax refund will be an alternative to normal pensions tax relief at one's marginal tax rate. This incentive is restricted to SSIA holders who are taxable at 20% or exempt from tax and there will also be an income limit of €50,000. The bonus will be payable even where the SSIA holder is not in the tax net to begin with.

Underfunding of Pensions

The Bill contains provisions to assist those who leave their pension funding until late in their careers. Under new Revenue administrative rules, an improved accrual rate will be introduced for employees with less than 10 years service to normal retirement age. This means that the 2/3rds pension can be accumulated at faster rates. In addition, the Bill provides for increased tax relief limits for pension contributions by individuals nearing retirement as follows:

Age % Earnings

55 and over 35% (extra 5% p.a.)

60 and over 40% (extra 10% p.a.)

These new limits will apply to contributions all pension products i.e. occupational or personal including PRSAs.

One-Person Pensions – pension assets in breach of investment rules

The Bill introduces a provision that where ‘one person’ pension schemes – otherwise known as ‘Small Self-Administered Schemes’ – breach investment restrictions (e.g. investing in a holiday home), the value of the asset will be deemed to be a taxable pension payment. The transaction will therefore be rendered tax inefficient.

ARFs – Anti-avoidance provision

The Bill provides for closure of a lacuna in the law whereby tax on deemed distributions can be avoided by investments by ARFs in commercial property used by the ARF owner. The Finance Act 2003 introduced investment rules for ARFs which operate, not by prohibiting certain transactions, but by rendering them tax inefficient through deeming them to constitute distributions from the ARF and therefore liable to tax at the owner's marginal rate. The transactions include for example, the acquisition of property for use as a residence or holiday home by the ARF owner or connected persons. This provision will add investment in commercial property, where used for the purposes of the business of the ARF owner or connected persons, to the list of such transactions.

Financial Services

Interest Withholding Tax on Eurobonds

Interest paid to non-resident holders of registered Eurobonds is currently subject to withholding tax, unless entitlement to exemption from Irish tax under the terms of a tax treaty can be established. This withholding tax was removed some years ago in the case of quoted bearer bonds for practical reasons, given that the residency of the underlying owner could not be established. The Bill extends this treatment to interest paid on quoted Eurobonds that are registered, in similar circumstances that apply to such instruments in bearer form. A minor technical amendment is also made to Section 64 TCA 1997, substituting a definition of “appropriate officer” for “appropriate inspector” in the legislation, thus allowing the Revenue Commissioners to authorise any of their officers for the purposes of this section.

Taxation of Certain Investment Funds

A number of changes to legislation relating to the Funds sector of the international financial services industry are included in the Bill. These will assist in the development of the sector and are listed below:

• Exposure to Capital Gains Tax – technical liability for nonresident unit holders of Irish funds. The intention has always been that non-residents unit holders of an Irish fund are exempt from all Irish tax in such circumstances. A doubt has arisen as to this exemption regarding CGT and this is clarified in the Bill.
• Re-domiciling of funds to Ireland – Stamp duty implications. The Bill amends the stamp duty code so that where foreign collective funds transfer assets (whether foreign or Irish) to an Irish collective fund, in exchange for the issue of shares/units, that such transfers will be exempt from stamp duty.
• Receipt of interest on certain Irish debt instruments gross by Funds. As Irish funds are tax exempt they receive dividends free of Irish withholding tax and DIRT, thus avoiding the necessity to make subsequent tax returns. However in certain circumstances they do not receive interest gross and must then recover the tax from Revenue. The Bill contains provisions to exempt funds covered by the investment undertaking definition (S. 739B TCA 1997) from withholding tax on interest.
• Common Contractual Funds (CCFs) /Mergers & Amalgamations. The Bill provides for a tax exemption arising on foot of a reconstruction or amalgamation exclusively between non-UCITS CCFs, in line with the treatment for other investment undertakings. The Bill also updates the definition of CCFs in line with new funds legislation enacted last year.
• Operation of Encashment Tax as it applies for the investment fund sector. The Bill exempts funds from the deduction of encashment tax. This tax applies in the case of payments made by banks when encashing certain securities on behalf of their customers.

Capital Gains Tax

Exemption of Specified Bodies

Registered Trade Unions, Approved Bodies and Bodies established by Statute for the purpose of promoting games and sports are exempted from capital gains tax. A technical amendment is being made to the provisions to ensure that the exemption only applies to the extent that the proceeds from a sale of assets by the bodies are applied towards the objectives of the bodies in question.

Milk Production Partnerships

The Retirement Relief for Capital Gains Tax is amended to ensure that there is no loss of relief in respect of spouses who are co-owners of lands farmed by their spouse in Milk Production Partnerships and who have been exempted by the Minister for Agriculture & Food from the condition that they are required to become partners in such partnerships.

CGT - Tax relief in respect of Artistic/Heritage items

There is an exemption from capital gains tax on the disposal of a fine art object where the object had been, for at least the previous 6 years, on loan to and on public display in, a gallery or museum in the State. The Bill extends the 6 year period to 10 years to counter possible misuse of the scheme. In addition, the Irish Heritage Trust is being added to the list of Approved Bodies who can receive such donations.

Stamp Duty

Stamp Duty on Combined (ATM and Debit) Cards

The basis of the annual stamp duty charge on combined (ATM and Debit) cards is being changed to reflect their usage during the year. If the card is used solely for ATM or Debit transactions the charge will be €10, whereas if it is used for both functions, the existing €20 charge will apply.

Demutualisation Issues

A change is being made to allow stamp duty restructuring relief to apply in the case of certain life assurance company demutualisations. The Bill also provides for Revenue to obtain certain information on Irish members involved in a demutualisation of a life assurance company or a building society to enable the consequent capital gains tax liability of such members to be finalised in a speedy fashion.

Capital Acquisitions Tax

Relief for Agricultural Property with Development Potential

The clawback in respect of agricultural and business reliefs is being extended in the case of land with development value which is disposed of within 10 years after the gift or inheritance on which the reliefs have been claimed. Under the present rules, the clawback of relief applies where the land is disposed of within 6 years of the acquisition of the land. The change will apply a clawback of relief in respect of the development value of the land where it is disposed of in years 7 to 10 after the acquisition of the land.

Discretionary Trust Tax

The chargeable date for the annual 1% levy on discretionary trusts is being changed from 5 April to 31 December and the return date for that tax is being changed to 4 months after the chargeable date rather than the current 3 months, in line with main stream CAT requirements.

Capital Gains Tax / Stamp Duty Tax

Foster Children

The Bill provides that ‘foster children’ will now be treated as if they were natural or adopted children for the purposes of Capital Gains Tax and Stamp Duty reliefs, subject to certain conditions being fulfilled. This treatment already applies for Capital Acquisitions Tax.

Courts Service and IAASA

The Courts Service is being exempted from Capital Gains Tax and Stamp Duty and the Irish Auditing & Accounting Supervisory Authority is being exempted from Capital Gains Tax.

Life Assurance

Life Assurance Policies Gross Roll up Regime

Legislative changes were included in the Finance Act 2005 so as to ensure that the 23% Exit Tax on the proceeds of a life assurance policy cannot be deferred indefinitely by the continual rolling over of a policy without it becoming chargeable to the tax. Those changes were made subject to a Commencement Order pending the outcome of ongoing discussions with the Industry. Certain amendments are now being made in response to some of the issues raised by the Industry. These amendments are:

1. The charge will arise at the end of 8 years instead of 7 years, except in the case of certain regular premium policies where the charge will be at theend of 12 years,
2. Where this tax is higher than the tax liability arisingon subsequent encashment of the policy, there will be a refund of the tax overpaid,
3. These changes will come into effect from 1 January2009, i.e., eight years after the current system came into effect in 2001.
4. A comparable regime will be introduced for domestic unit funds and foreign life assurance and unit funds selling to Irish policyholders.

Life Assurance Companies

The Bill tightens up the definition of profits of life assurance companies arising from life assurance policies contracted before 1 January 2001 to ensure that life companies only benefit from group loss and certain other loss reliefs at the corporation tax rate (12.5%) as opposed to the standard rate of income tax (20%).

Indirect Taxes

Excise Increased Penalties on Summary Conviction for Certain Excise Offences

It has been the practice to set the monetary penalty for summary offences at the maximum allowed for cases heard in the District Court. As fines up to €3,000 are now considered appropriate in such cases, the summary penalties for specific penalties in excise law, which are currently set at €1,900, are being increased accordingly. This will put such penalty levels in line with measures already taken in recent Finance Acts.

Extension of mineral oil tax on Coal to “substitute solid fuels”

As required under the Energy Tax Directive, Mineral Oil Tax law was extended to cover non-domestic coal in the Finance Act 2005. For full compliance however, the scope of the tax on coal is being extended to include “substitute solid fuels”, e.g. lignite and solid fuels manufactured from coal and lignite, which have the same heating uses as coal. The rate for business use is €4.18 per tonne and for other use, €8.36 per tonne.

Extending Alcohol Products Tax to cover alcohol in non-liquid form.

A powder which can be mixed with water to produce an alcopop drink has appeared on the German and Danish market. This product is taxable under EU law, but it would be difficult to support a charge under Irish Alcohol Products Tax law, where rates are currently set by reference to the alcoholic strength of a liquid. While this powdered product has not yet surfaced on the Irish market, the Finance Bill provides that Alcohol Products Tax is charged on a non-liquid alcohol product at the same rate as a liquid product of the same type and strength.

VAT

Deductibility for expenses incurred in the issue of new shares issued to raise capital

A number of recent decisions by the European Court of Justice (ECJ) have expanded the scope of deductibility entitlement beyond what is currently allowed in the VAT Act. One such case involved allowing the deduction of expenses incurred in the issue of new shares designed to raise capital. An amendment to the VAT Act is being made to reflect this ruling.

The Package Rule for VAT

An amendment to the VAT Act is being made to replace the current package rule by a rule whereby the VAT liability on the total consideration will be ascertained by either valuing each component separately at the appropriate rate/s or by applying the rate of the principal component to all the components, where appropriate. This is being done to give effect to a recent ECJ ruling.

Taxable supplies and taxable amount for VAT

Amendments to the VAT Act are being made to bring it into line with recent ECJ rulings covering the private use of deductible property, and the taxable amount in the case of self-supply of non-deductible services. The amendments provide for the taxation of private use of property on which a taxpayer takes deductibility. This will become taxable as a supply of services.

EU Directives - Regulations on VAT and Excise

Amendments are being made to VAT, VRT and Excise primary law to allow the Minister for Finance and the Revenue Commissioners to make regulations containing such incidental, supplementary and consequential provisions as appear to them to be necessary, in addition to the primary law, for the purpose of giving full effect to the Sixth, Eighth and Thirteenth Council Directives for VAT, and the various Directives and/or Decisions of the EU affecting VRT and Excise law.

Determinations by Revenue Commissioners

An amendment to section 11(1B) of the VAT Act is being made to provide that the Revenue Commissioners can notify taxpayers of the date from which a determination has effect rather than as at present where a mandatory effective date which is always linked to the making of the determination itself applies.

Revenue Powers

Automatic Reporting

The Revenue Powers Group recommended the automatic reporting to Revenue of interest payments on deposits in financial institutions, the profits earned on other financial products and payments made to taxpayers by Government departments and agencies. The Bill includes an enabling provision which allows for the making of regulations requiring financial institutions to make an annual return giving the names and addresses of customers resident in the State to whom any interest or other profit was paid together with the amounts of such payments made to each customer. This provision will facilitate the phasing-in of coverage. It allows for consultation on the mechanics of reporting systems with the institutions and an evaluation of the systems as they are extended to the different classes of institution.

Measures to deal with concealment of tax avoidance schemes

The Bill contains measures to strengthen the general anti-avoidance provisions in Section 811 of the Taxes Consolidation Act 1997. Section 811 is being amended to provide that where the opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction becomes final and conclusive there will be a 10% surcharge on the liabilities established and those liabilities (before surcharge) will be backdated, for the purposes of charging interest, to when they would have arisen but for the failed avoidance. However, it will be possible for the taxpayer to protect against both surcharge and interest by notifying Revenue of the transaction concerned – without prejudice as to whether or not there is tax avoidance involved.

Tax Administration

Relevant Contracts Tax

The Bill provides a number of changes in relation to the legislation governing the administration of Relevant Contracts Tax (RCT), the tax which principal contractors are obliged to deduct at a rate of 35% from payments made to certain subcontractors in the construction, meat processing and forestry sectors. The purpose of these amendments is to tighten control and to discourage fraud. The main changes are:

1. the provision of a statutory basis for the limit which Revenue currently applies administratively on the amount of gross payments that a principal contractor can pay to a subcontractor on foot of a relevant payments card;
2. a provision to allow Revenue refuse a certificate of authorisation (C2) to an applicant where a person connected to the applicant (typically a phoenix company situation) does not meet the compliance requirements of the RCT legislation as regards payment of tax, making of returns and keeping of records;
3. a provision to allow Revenue to take into account an applicant's likely future tax compliance in determining whether a C2 should be issued.

Anti-Avoidance

Film Leasing

As part of the process of preventing individual taxpayers from setting off unrestricted amounts of relief against all their income, the Bill provides that master film negatives will no longer be exempt from the ring-fencing provisions that apply to the setting-off of capital allowances against non-lease income. In future these capital allowances will only be offsettable against the leasing income from the particular master film negative.

Capital Acquisitions Tax

Transfer of Irish Assets into Foreign Company

A measure is being introduced to deal with a situation whereby Irish domiciled individuals may get around an anti-avoidance provision in the CAT code by having Irish assets held in a foreign company which is itself owned by another foreign company. The measure provides for the value of the underlying Irish situate assets to be taken into account, no matter how many layers of companies are involved in direct and indirect ownership of such assets

Capital Gains Tax / Capital Acquisitions Tax

Disallowance of Capital Gains Tax offset against Capital Acquisitions Tax in certain cases

An anti-avoidance provision is being introduced to disallow the offset of the CGT liability against the CAT liability, in the case of a gift, where the person who acquires the asset disposes of it within 2 years. The offset is being used in the context of a parent selling property at arm's length to a third party and gifting money to a child by an intermediate transaction which reduces the total tax take, as compared to a normal sale, followed by a gift of the sale proceeds to the child.

VAT

Compulsory VAT Grouping Rule

Under Article 4(4) of the Sixth VAT Directive, EU Member States may opt to treat certain closely connected persons as a single taxable person. Ireland has availed of this option. In addition to using this provision as an administrative simplification, Revenue has used it to combat VAT avoidance by requiring closely connected parties to be grouped together in certain cases. The amendment ensures that VAT grouping may be done where the Revenue Commissioners are satisfied that it is necessary or appropriate to do so for the purpose of efficient and effective administration, including collection, of tax.