PRESS RELEASE

European Influence Dominates Finance Bill – ICAI

(Thursday, 01 February 2007) The Institute of Chartered Accountants in Ireland said today that never before has European influence been so obvious in Irish Tax Legislation, following the publication of today's Finance Bill.

“In a Bill which contains few surprises it is the power of the EU institutions in determining Irish Tax Policy that stands out” according to ICAI Director of Taxation, Brian Keegan.

“The proposed new domestic reliefs, such as the revisions to the BES, the Shannon Area tourism incentives, and the new regime for the bloodstock industry are all subject to Brussels approval. Other reliefs, such as the relief for cross border losses incurred by groups of companies, are actually required by decisions of the European Court of Justice. Even some of the apparently unilateral reliefs being introduced, such as tax credits in Ireland for Capital Gains Tax paid in other countries, are pragmatic measures reflecting Ireland's position in the European context.” Many of the VAT, Excise and Vehicle Registration Tax changes are also the consequence of European rulings and decisions.

Unfortunately the measures announced in the 2007 Budget to help ensure taxpayers can avail of their tax relief entitlements are counterbalanced in the 2007 Bill by further compliance and enforcement powers being granted to Revenue. “Revenue will now have further powers to insist on information being provided to them in electronic format. This will undoubtedly make their job easier, but such measures are apparently being put in place without taking account of compliance costs for taxpayers” said Mr Keegan.

The proposals for groups of companies paying Corporation Tax which allow such groups to take into account their overall payments in case of any individual company shortfall is good and fair. Combined with the related changes announced at Budget time, a significant overhaul of the Corporation Tax rules to the benefit of compliant companies has been achieved.

ICAI FINANCE BILL 2007 COMMENTARY

I. Additional Announcements to Budget Measures

A. Business Expansion Scheme (BES) and Seed Capital Scheme (SCS)

The BES and SCS are being renewed for a seven year period to 31 December 2013, subject to EU Commission State-Ad approval.

In addition to the measures introduced in the Budget, a number of other changes have been proposed in the Finance Bill, including the extension of qualifying trades to recycling companies who have had a grant or financial assistance made available to them by an industrial development agency. In his announcement on Thursday 1 February 2007, the Minister for Finance said that the other amendments were aimed at improving the operation of the schemes.

The Minister mentioned that the Department of Finance has already engaged with the Commission on the requirement for approval under the State-Ad rules. It is not certain when the Commission will make its decision.

B. Preliminary Corporation Tax Payment Arrangements

The current arrangements whereby large companies have to pay 90% of their final CT liability as preliminary tax one month before the end of their accounting period represents a significant burden on such companies and they generally overpay preliminary tax to avoid interest penalties.

Provisions are being introduced under which large companies will be allowed offset their preliminary tax payments between group members for the purpose of working out the adequacy of such payments for interest payments. This may prevent interest arising where say, one company in the group paid too much preliminary tax, while another paid too little.

II. Further Measures not announced in the Budget

A. Income Tax/Business

Introduction of Taxation Measures for Stallions

The current tax exemption on the taxation of stallion stud fees is due to terminate at the end of July 2008 and will be replaced by new tax arrangements which will have to be cleared with the European Commission.

The new arrangements will allow stallion owners to write off the purchase cost of stallions over a four year period and provide for the taxation of income from the sale of stallions. Certain transitional measures are also included.

New Mid-Shannon Corridor Tourism Infrastructure Investment Scheme

It is proposed to introduce a limited tax driven scheme for part of the mid-Shannon area. The proposed relief would be restricted to areas within a corridor of seven to eight miles from the river.

The relief will be provided by way of accelerated capital allowances over seven years on expenditure incurred on the conversion, refurbishment and new construction of commercial tourist related “Buildings and Structures” completed within a limited timeframe of the date of the commencement of the scheme.

Individual projects will be selected by a special midShannon Tourism Infrastructure Board, which will be set up by the Minister for Arts, Sports and Tourism in consultation with the Minister for Finance.

Restriction on High Earners

It is proposed to amend the provisions introduced in Finance Act 2006 to limit the use of certain tax reliefs, including certain exemptions, by some high-income individuals. Included in the proposals are a number of amendments to last year's legislation to ensure the restriction operates as intended, to correct various references and to modify some of the terminology used in various provisions of the overall measure.

Transfer of Assets Abroad

There are a number of changes proposed to ensure that owners of assets abroad cannot enjoy the benefit of these assets in the State without payment of the appropriate tax in Ireland.

The main change relates to an exemption from the charge that is available if the individual concerned can satisfy the Revenue Commissioners that the purpose of the assets transfer was not to avoid tax or that the transactions concerned were bona fide commercial transactions and were not designed for tax avoidance reasons. The changes will ensure that all relevant factors, relating both to the subjective intentions of the individual and the authenticity of the transaction itself, are to be taken into account in determining whether or not a transaction has an avoidance purpose.

Offshore Income Gains

A technical amendment is being made to extend an anti-avoidance provision regarding offshore income gains to persons resident in the State. The Finance Act 1998 extended anti-avoidance provisions relating to the transfer of assets abroad to persons who are resident as well as ordinarily resident in the State. Through oversight this amendment was not extended to income from offshore gains. This is now being rectified.

Scheme of Tax Relief on Donations to Approved Bodies

Certain references to “in the State” are being removed as a result of representations by the EU Commission. In addition, a number of named bodies are removed from the Schedule either because they are defunct or are established charities.

Partnership Profits

The Bill will close a loophole in relation to unallocated partnership profits by an amendment to Section 1008 TCA dealing with the assessment of partners. The amendment clarifies the position that the tax-adjusted profits of a partnership must, for tax purposes, be fully apportioned between the partners each year with the profits so apportioned being taxable at the partners marginal tax rates.

Relevant Contracts Tax

Among the changes are:

• The definition of relevant contract is being broadened to include the installation of mobile telecommunications networks and local wireless networks
• The list of principal contractors is extended, primarily to include persons engaged in site development

There have been a number of changes to the taxation of pensions

• Standard Approval Conditions for Occupational Pensions Scheme “Products”
  For reasons of administrative efficiency, the law is being amended so that in future certain schemes will qualify as exempt approved schemes for tax purposes without the need for individual Revenue approval, where conditions are met.
• Pensions Incentive Tax Credits Scheme
  Following the introduction of the Pensions Incentive Tax Credits scheme in the 2006 Finance Act, it is proposed that SSIA moneys invested in pension funds together with any credits received under the scheme in respect of those investments would have to be held for at least one year, otherwise there would be a claw-back of the credits.
• Taxation of ARF Deemed Distributions
  The amendment will give ARF managers an additional month to account to Revenue for any tax deducted on a deemed distribution for tax purposes.
• Limit on Tax Relieved Pension Funds
  It is proposed that any benefit arising under a pension adjustment order (PAO) is deemed to be a benefit arising to the individual for the purposes of determining whether the individual's standard fund threshold or personal fund threshold has been exceeded.

B. Corporation Tax

Cross-border loss relief for companies

The provisions for company group relief are being amended mainly to deal with the issues of crossborder losses raised in the ECJ decision on the Marks & Spencer case, insofar as they have relevance for Ireland. Subject to certain conditions, the amendment will allow an Irish-resident parent company to offset against its taxable income the losses of an EU/EEA resident company.

Dividend Withholding Tax (DWT)

Three amendments are proposed to the scheme of dividend withholding tax (DWT) as follows:

• The first amendment provides for the introduction of electronic dividend vouchers;
• The second amendment clarifies the legislation to ensure that the general 4-year time limit that applies to other tax repayments also applies to refunds of DWT;
• The third amendment extends the exemption from DWT that is available to non-resident subsidiaries whose parent company is quoted on certain recognised stock exchanges outside Ireland to cases where the parent company trades only on the Irish Stock Exchange.

Financial Services

Taxation of Irish Companies with Foreign Branches

It is proposed to provide unilateral credit relief for foreign tax suffered by a company that has a branch or agency in a country with which Ireland does not have a tax treaty. This allows such a company to reduce its Irish corporation tax liability by the foreign tax suffered on the profits of the branch or agency. In the absence of such relief, the company would only be entitled to a deduction for the foreign tax in computing its taxable income.

Treatment of Interest as a Distribution

Interest which is paid to a 75% related non-resident company is treated as a distribution and is disallowed in calculating a company's income for tax purposes. Prior to 1 January 2006, IFSC and Shannon companies who met the other conditions could opt not to have the distribution treatment apply, regardless of the location of the recipient of the interest.

In certain cases double taxation can arise where the interest is disallowed as a trading expense under the distribution rule and is also taxed in the hands of the recipient as interest. Subject to the conditions, a company paying yearly interest to a non-resident 75 per cent parent or associated company may treat such interest as a deductible trading expense.

Foreign Currency Matching

It is proposed to amend section 79B of the Taxes Consolidation Act 1997 to ensure that the original provision as amended by Section 62 of Finance Act 2006 operates as intended. This measure will take effect from the date of commencement of the original provision.

Double Taxation Agreements/Tax Information Exchange Agreements
Unilateral Credit Relief against CGT for Certain DTAs

It is proposed to provide unilateral credit relief for tax suffered on capital gains in certain countries. The countries concerned are: Belgium, Cyprus, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Pakistan and Zambia. In these cases Ireland has a tax treaty that pre-dates the introduction of capital gains tax in the State. The section provides that, where a person, whether an individual or company, who is chargeable to tax in the State in respect of a capital gain, suffers tax on the gain in the other country concerned, the foreign tax will be credited against Irish capital gains tax on the gain.

C. Capital Taxes

Tax Clearance for Residential Property Tax

It is proposed to abolish the requirement to obtain clearance from Revenue on the sale of certain properties.

Definition of Child – CGT

It is proposed to extend the definition of a child for disposals for capital gains tax purposes within a family of a farm / business to a grandchild, where the parent of the grandchild is a deceased child.

Site to Child – Stamp Duty/CGT

Budget 2001 introduced an exemption from stamp duty and capital gains tax where a parent transferred a site to a child for the purpose of building a dwelling for residing in themselves. At that time there was no restriction on the actual size of the site. It is proposed to amend this exemption by limiting the size of the site area to 1 acre – exclusive of the proposed house site – in order to counter potential abuse where large tracts of land may be transferred, in certain areas.

Dwelling House Relief – CAT

Changes are being introduced to prevent possible abuse of this provision by wealthy individuals transferring expensive houses to their children by ensuring that any period during which a child of a disponer, in relation to a gift, occupied a house that was during that period the disponer's only or main residence will not be treated as a period of occupation in the 3-year period prior to the date of the gift.

It also ensures that the reference to ‘'other property’’ means, in the case of a house comprised in a gift, other property owned by the disponer.

CGT Exemption for Sports Bodies – Anti-Avoidance measure

A technical amendment is being proposed to rectify an anti-avoidance provision relating to the exemption from capital gains tax, available to designated Sports bodies. It is a provision of the relief that all proceeds must be used for the purpose of promoting athletic or amateur sports or games. This provision closes a loop-hole whereby a sporting body can transfer assets into a company before disposing of them in order to avoid having to use the full consideration for sports purposes.

Farm Transfers within Families – Stamp duty/CGT

It is proposed to alter the position where certain exchanges of farm land are made within families. The provisions of CGT retirement relief are being amended so that where a qualifying farmer disposes of land to a child in exchange for land that is owned by the child, the relief will be extended to the land being disposed of by the child. Relief from stamp duty is also being introduced in this circumstance to the land being purchased by the parent from the child. Clawback measures will be introduced where the land is subsequently disposed of outside the family.

First Time Buyer: Divorce/Separation – Stamp Duty

It is proposed to extend the existing first-time buyer stamp duty provision relating to persons who have undergone a judicial separation/divorce. This will ensure that where the existing condition, that the ‘family’ home must still be used by the other spouse, is not met as a result of the sale of the house, the individual can still benefit from first-time buyer relief.

Agricultural / Business Relief – CAT

It is proposed to alter the date from which interest becomes payable in the context of a clawback of relief where the assets are sold within the qualifying period. The interest will now apply from the date the clawback arises.

Discretionary Trust Tax – CAT

It is proposed to change the date on which the tax becomes payable where a trust is created following death. This follows a High Court decision earlier this year. The tax will now apply from the date of appointment to the trust instead of the date of death as before.

D. VAT

There's a mixed bag of VAT measures, most of which are as a consequence of EU rules or ECJ rulings.

S70

Arising from EU challenges to Irish practice, VAT on certain services received by public bodies (e.g. consultancy services) from other Member States, where no VAT is applied in those Member States to the services involved, will no longer be subject to Irish VAT. From a similar challenge, finance houses, in cases where the customer defaults on repayments, will be treated as taxable persons insofar as they are dealing with repossessed items (s76).

S71

Landlords will no longer be able to waive VAT on the short term letting of residential property. The changes will apply to properties acquired or developed after the passing of the Finance Act 2007 and will apparently affect lettings in existence prior to that date.

S73

Described as an anti-avoidance measure, this section provides for the application of the open market value to certain transactions between connected parties in determining the amount on which VAT is chargeable. Directive 2006/69/EC is cited as the authority to introduce the provision.

There are other, largely technical measures, some in connection with the accession of Bulgaria and Romania to the EU. An Appeal Commissioner's determination is overturned, to ensure that vegetable juices are taxable at the standard rate!

E. Revenue Powers

S113

Revenue's super duper new Risk Evaluation Analysis and Profiling system (REAP) has sown some new legislation to ensure that the Revenue computers, rather than people, will be reading Forms 46G and other third party returns in future. It seems this provision will take effect after the passing of the Finance Bill.

Other changes to the administrative environment include:

• A new offence, of impersonating a Revenue officer with the intent to deceive (s115)
• Interest on repayments will now be calculated from 3 months after the date the claim is made, rather than the current 6 months. This is still unfair to taxpayers, and biased towards forgiving Revenue inefficiency. It's mostly the compliant taxpayer who tends to overpay tax.

ICAI REPRESENTATIONS OUTCOME

What ICAI asked for in its Pre-Finance Bill/Pre-Budget Submissions and what we got.

Promotion of Business

What we sought:

Extend the R&D and BES reliefs to support both the development and exploitation of technology in Ireland.

Outcome:

Both the R&D and BES schemes are being substantially enhanced. In addition they are being extended to recycling companies.

What we sought

Publication of details of the proposes replacement schemes for Stallion Fees at the earliest possible date.

Outcome:

The proposed replacement of the taxation of Stallion Fees published in the Finance Bill.

Simplification

What we sought:

Permit companies to base their preliminary tax payments on the tax due for the preceding accounting period.

Outcome:

Companies with a previous year's liability of up to 150,000 may base their preliminary tax on the amount paid in the previous year.

In addition, it is proposed that large companies will be allowed offset their preliminary tax payments between group members for the purpose of working out the adequacy of such payments for interest payments.

What we sought:

Remove the condition that approved courses be provided by approved colleges for the purposes of granting tax relief on fees.

Outcome

It is proposed to grant tax relief at source in the future for college fees.

What we sought:

Abolish the RPT clearance procedure on a cost/benefit.

Outcome

It is proposed to abolish the RPT clearance procedure.

Environment

What we sought:

The expiry date for relief in investing in Renewable Energy should be extended by at least another two years.

Outcome:

The expiry date is being extended to 31 December 2011.

What we sought:

Promote Crops which are only suitable for bio-mass projects.

Outcome:

A programme of grant aid to support cultivation and harvesting of such crops.