Mr Kevin Cardiff
Second Secretary
Department of Finance
Government Buildings
Merrion Square
Dublin 2

7 February 2007

Dear Kevin

Finance Bill 2007

First of all, congratulations on your recent appointment, and we wish you well with your new responsibilities.

The purpose of this letter is to make some observations on the Finance Bill as initiated in anticipation of Committee Stage. We appreciate the tight timescale to which you and your colleagues are working, and therefore have limited our comments to the issues we see as most important, and in need of review. Most of what follows has already been raised with Revenue at Main TALC.

BES – s18

The welcome raising of the investment thresholds for BES, and the other pragmatic improvements to the scheme, has made the relief more viable for a range of businesses. We note the extension of the relief to waste recycling activities. We believe there is a good argument also for reintroducing the relief to shipping industries, as were covered under the original terms of the scheme. We understand that other EU Member States such as Germany and Holland offer comparable tax relief for individuals for investment in shipping.

Mid Shannon Relief – s26

It is clear that tax incentives influence investment decisions, and any new relief in this context is welcome. An important component to the success of this new relief will be the timely publication of commercially viable guidelines from the Department of Arts, Sport and Tourism, which should become available at the latest at the time EU approval is secured for the measure.

Consideration should be given to reducing the holding period of the investment from 15 years to 10 years. A 15 year holding period will be a strong disincentive to availing of the relief, as investments in tourism infrastructure would not in practice be held for this long.

The difficulty with the 15 year holding period is that it makes it very difficult to raise tax based finance. It is likely given the examples used by the Minister in the second report stage speech that a number of target businesses will be started up. Consequently, the owners will not have the capacity to avail of the tax incentives and they are likely to warehouse these tax allowances. A tax based investor would probably be unwilling to hold an asset for 15 years if there is no commercial upside. The danger is that the business would run into difficulties throughout this 15 year period, which could result in the bank foreclosing on a loan and selling the property. In such a scenario, the tax based investor will not only lose his equity but also the benefit of the tax incentive. We believe there is little merit in introducing new reliefs into the statute books unless they have a good chance of succeeding.

Relevant Contracts Tax – s28

Principal Contractor

The new clause which extends the definition of “principal contractor” to “any board or body established by or under royal charter” may be catching more organisations than was apparently the intention outlined in the Explanatory Memorandum. For example, we understand that one of the major clearing banks may now become a principal contractor, as does the Institute of Chartered Accountants in Ireland. We suggest that the defining clause might be more tightly drafted to avoid what might be an unintended effect.

Increased Monitoring of RCT1 declarations

A number of items of legislation have been introduced in recent years which enable Revenue to police policy initiatives, and share information with other State Agencies, such as the ODCE. A new and unwelcome precedent was established in Finance Act 2006 whereby additional tax sanctions are imposed for failure to comply with the requirements of a State Agency other than Revenue, in this case the Private Residential Tenancies Board.

We now understand that a new Agency, the Office for the Director of Employment Rights Compliance (ODERC) is to be established which will also benefit from intelligence to be provided by Revenue. We wish to point out to Revenue that its increasing role and status as enforcer of choice for Government initiatives dilutes its primary administrative role in the administration and collection of taxes.

There is an anomaly in the drafting, in that declarations in relation to the employment status of a company may have to be made. Generally, a company may not be an employee, and this aspect of the requirement at least should be removed.

Unitised Investments – ss35, 36

Introductory Comments

This legislation, which in effect attempts to bring the tax regime for such investments into line with that applicable to certain pension investments, is too broad and could damage the investment market. There are now four distinct rates of tax that can apply to investment income: 20%, 23%, 41% and 43%. Taking into account the various rates of PRSI and levies that can apply depending on the situation the level of complexity in this area is immense, and taxpayers are becoming increasingly confused with regard to which rate of tax is meant to be imposed from an overall policy perspective.

It appears that the new approach links the rate of tax to be paid directly with the level of risk involved, with low risk investments in bank deposits and UCITS or similar funds being taxed at 20/23%, and high risk investments such as investing in bonds issued by Irish companies or so-called Personal Portfolio Investment Undertakings (which are more likely to take on high levels of risk and diversify investments outside a narrow scope of Irish property) being taxed at 41/43%. The impact that tax can have on an investment decision therefore becomes substantial. There is in effect no difference between an investment yielding a risk-free income return of 5% in say a high yield bank deposit, and a medium risk investment in a bond returning 8%, issued say by an Irish (non-banking) company.

Further, many property based unitised investments have no annual income yield, and the return in reality constitutes a capital gain, which the legislation seeks to tax at income tax rates.

Issue and Proposal

S.36 of the Finance Bill has the effect of taxing most foreign property holding companies at 43%. For example if two Irish individuals purchase a UK property company, they are likely to be subject to 43% CGT, while if they acquired an Irish property company, the rate would be 20%. We believe that this new tax rate is contrary to EU law.

If it is the intention of the Department of Finance and the Minister to prevent Irish individuals from availing of foreign wrapper products, we believe this could be achieved differently. For example we suggest that the definition of material interest in an offshore fund contained in S.747B should be amended to exclude shareholdings in companies. The definition would therefore be similar to the equivalent legislation in the UK. We also believe that there is adequate legislation to safeguard Revenue under S.590 (attribution of foreign gains) and in S.806 TCA 1997 (transfer of assets abroad). We strongly believe that it is inevitable if the legislation is enacted as provided that there will be a successful challenge under EU law.

Additional Observations

The legislation, though not retrospective in drafting, is retrospective in effect, as it changes the tax regime for existing investment structures entered into in good faith. It is unfair that some individuals are now to be penalised for investing in certain types of, for example, offshore funds which the Finance Bill proposes will not be treated as offshore funds with effect from 1 February 2007. At a minimum the changes outlined in these sections should only apply to “investments made after 1 February 2007”.

The drafting of the term “investor” in s36 is so broad as to mean that most investment undertakings or offshore funds will be subject to the new regime. Every foreign company is now potentially an offshore fund unless significant steps are taken, which in many cases may not be possible. This will create difficulties in bringing new unitised funds, which essentially are “retail” in nature, to market. We strongly suggest that in establishing the types of investment affected, that the criteria be determined by the likely number of unit holders in the particular structure, rather than by the circumstances of the individual investors. Specifically:

• there needs to be exclusions for quoted companies generally;
• there needs to be exclusions for employees of banks and other institutions who might invest in units of funds managed by the institution, if only for the pragmatic reason that otherwise it would be impossible to draft a prospectus;
• there is no clarity generally on what might constitute a transparent entity;

Interest to Related Parties – s45

The thinking behind this measure of relief is welcome. However the retention of a withholding tax obligation on interest payments to non-EU/ non-treaty countries means that the relieving measures will have limited impact. What would assist in this regard would be the extension of the new Section to include short interest. Short interest to a related party abroad is subject to the distribution rules also and it is not consistent with the stated purpose of the new Section to confine the relief to annual interest only. The proposed extension may be of benefit to multi nationals conducting cash pooling operations from Ireland

Lastly, we wish to note that there are some provisions in the Bill which will be of great assistance to taxpayers, and in particular the new rules contained in s42 regarding the computation and payment of preliminary Corporation Tax.

Yours sincerely,

Marie Barr
Chairperson, CCAB-I Tax Committee

cc Mr Eamonn O'Dea, Office of the Revenue Commissioners