Press Release

ICAI—Finance Bill affirms Budget Changes, but little else

(Thursday, 31 January 2008) The Institute of Chartered Accountants in Ireland (ICAI) said today that the Finance Bill contains few new initiatives over those announced at Budget time, focussing instead on anti avoidance and “tidy up” measures for existing tax law.

“There will be some disappointment that measures necessary to enhance Ireland's position as a destination for Foreign Direct Investment are not contained in the Bill. ICAI has been promoting ideas such as modernising the tax regime for the Headquarters of multinational companies. If there is to be any further innovation to our tax system in this regard we will have to wait until further amendments to the Bill are announced at Committee Stage” said ICAI Director of Taxation Brian Keegan.

“On a more positive note new VAT rules should help remove uncertainties when dealing with commercial property lettings and sales. This was a notoriously difficult area of tax law, laden with traps for the unwary. The new rules for property comprise part of a wider package of VAT reforms.”

“A high proportion of this Bill deals with VAT and other indirect taxes. VAT now yields more than income tax to the Irish Exchequer, so it is particularly necessary to have up to date and fair rules” said Keegan.

Among the single biggest “new” items is the arrangement for the taxation of Petroleum Exploration and Production, introducing an effective Corporation Tax rate of up to 40%.

The Bill has many more changes affecting the Business community than will affect individual Income Tax payers. Changes to tax incentives for Research and Development are confirmed in the Bill, as are the changes to Stamp Duties announced at Budget time.

I. Additional Announcements to Budget Measures

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

The requirement that recycling companies must have received grant assistance before availing of the Business Expansion Scheme (BES) is being replaced by a requirement that they must have been approved for grant assistance or have a statement from an industrial development agency or county enterprise board indicating that they have submitted their business proposals to that agency or board before they avail of the scheme.

In addition to the above measure introduced in the Budget, the extension and amendment of the BES announced in Budget 2007 was approved by the European Commission in August 2007 and implemented via Ministerial Commencement Order in September 2007. These changes are included in Finance Bill 2008 in order to bring them permanently into effect.

Research and Development Credit

The base year for expenditure which is used to calculate the qualifying incremental expenditure on research and development (R&D) under the tax credit scheme is being fixed at 2003 for a further 4 years to 2013.

In addition to the above measure introduced in the Budget the base year rules are changed so that for the future, the base year is a corresponding year ending 10 years before the end of the year of claim (e.g. for 2014 the base year will be 2004).

Site to a child — CGT relief

Effect is given to the proposal in the Budget statement to increase the exemption threshold from €254,000 to €500,000.

In addition, it is clarified that the threshold of €500,000 will apply where both parents make a simultaneous disposal of a site to their child. This amendment applies to disposals made on or after 6 December 2000.

Film Relief

Film relief is being extended for another 4 years until 31 December 2012 and the overall ceiling on qualifying expenditure for any one film is increased from €35m to €50m. These provisions are subject to a commencement order of the Minister for Finance after clearance with the European Commission.

Clawback of s tamp duty from first time buyers

An anti-avoidance measure is being introduced to ensure for certain categories of purchases, that the benefit of the relief cannot be availed of indirectly by an individual who is not a first time purchaser. The change will ensure that the First Time Purchaser Relief is restricted to “genuine first time purchasers^” and will apply to instruments executed on or after 31 January 2008.

VAT on Property

There are detailed provisions dealing with the proposed new rules on VAT on Property. In summary, according to the Explanatory Memorandum, the new rules intend:

• The supply of houses and apartments—whether by the sale of the freehold or via a very long lease (a “freehold equivalent^”)—for residential purposes will continue to be taxable at 13.5%.
• The supply of commercial buildings—whether by the sale of the freehold or the freehold equivalent— will be taxable only while the building is considered “new”.
• The supply of “old” buildings will be exempt from VAT, but there will be an option to tax such supplies. Where the option to tax is exercised, VAT will be charged on the actual consideration, subject to any specific anti-avoidance rules that deal with artificially reduced considerations. The option will be exercised jointly by the vendor and purchaser. VAT will be accounted for by the purchaser, under the reverse charge mechanism.
• The supply of “building land” will be taxed in the same way as it is taxed currently. The VAT treatment of undeveloped land (e.g. farm land) will not be affected. Land that is sold in connection with a contract to develop it will continue to be taxable.
• Most leases will be exempt from VAT but leases that represent effective ownership will be treated in the same way as supplies of the freehold.
• A Capital Goods Scheme is being introduced. Deductibility for input VAT relating to a property will be initially allowed by reference to the use of the property for the first twelve months of full use. The CGS will require an annual review by the taxpayer of the use to which a property is put over the following 19 years (in terms of taxable or exempt use). Where there is a change in use, an adjustment of deductibility will be required. The adjustment will reflect the difference between the use in the initial twelve months of use and the use in the year in question. Ultimately, the proportion of VAT deducted will reflect the actual use of the property over the twenty-year period.
• There will be an option to tax rents on commercial buildings where the landlord and tenant are not connected persons. The option may be exercised by the landlord and VAT at 21% will be chargeable on the rents. Where the option is cancelled while the building is still subject to the CGS, a CGS adjustment will apply.

As mentioned in the Budget, these measures take effect from 1 July 2008.

II. Further Measures not announced in the Budget

A. Income Tax/Business

Relevant Contracts Tax (RCT)

“Connected persons” rule in TCA97 s531 is being amended, whereby any person connected to a construction company etc is deemed to be a principal contractor and required to operate RCT, so that it does not apply to “innocent” incidental connections.

Revenue are permitted to make regulations removing the requirement to make an RCT1 declaration from certain classes of principal contractors.

Amendments to Shares Schemes

An increase is proposed in the upper limit from €320 to €500 that can be saved monthly by employees for the Save-As-You-Earn Scheme (SAYE).

An amendment to the legislation governing Employee Share Ownership Trusts (ESOT) will be made to give Revenue the power to reduce the current requirement for a loan period of 10 years in relation to shares being purchased for employees. This will be done on a case by case basis, while still facilitating access to three times the annual tax relief limit for employees.

A change to the tax treatment of shares and other securities issued to employees and directors where such shares have a ‘convertible’ clause is being implemented. This will mean a second income tax charge will be made on such shares on the date that they are converted to shares of a higher value.

An amendment is being made to provide for the automatic filing of returns for the four approved schemes.

Employee Benefit Trusts

An anti-avoidance provision is being made to the legislation governing taxation of undistributed sums held in employee benefit trusts. It is proposed to

• align the timing of tax deductions that are granted to employers in respect of contributions to an employee benefit scheme with the time the benefit from those contributions becomes taxable in the hands of the employees.
• broaden the meaning of an employee benefit contribution such that any action which results in assets being held, or able to be used under the terms of an employee benefit scheme, or in an increase in the value of such assets, is within the meaning of an employee benefit contribution, and consequently covered by the relevant provisions.

The amendment applies to employee benefit contributions made on or after 31 January 2008.

Salary Sacrifice

It is proposed to define the term “salary sacrifice” and specify where such arrangements can apply. This is intended to copper-fasten existing Revenue practice.

Restriction on High Earners

A technical adjustment is being made to ensure the correct order in calculating certain tax reliefs where the ‘horizontal’ measure is engaged. It will ensure that the intention of the measure will continue to be met.

Capital Allowances

Caravan and Camping Parks

Capital allowances are proposed for buildings and structures erected in Caravan/Camping parks. The section applies to expenditure incurred on or after 1 January 2008.

Childcare Facilities

Amendments to capital allowances scheme are required to reflect new Childcare Regulations and to tighten up the definition of ‘property developer’ under the scheme. Property developers are excluded from benefiting under this and other schemes.

The Finance Bill also makes similar changes to the definition of ‘property developer’ in the other schemes (which are the schemes of capital allowances for private hospitals, mental health centres and the Mid-Shannon Corridor Tourism scheme).

Removal of Marginal Relief

The general exemption limits are being abolished from the income tax code through the repeal of TCA97 s187 on the basis that they are no longer necessary as a mechanism to assist those on low incomes.

B. Corporation Tax

Taxation of Foreign Dividends

The taxation of foreign dividends is being amended to take account of the ECJ FII Group decision. Rather than use the opportunity to amend the legislation to enhance Ireland's position as a location for Foreign Direct Investment, the measures being introduced implement the ECJ decision to the very minimum level.

Foreign dividends are dividends received by companies within the charge to Irish tax from companies that are resident for tax purposes in EU Member States or in countries with which Ireland has a tax treaty. Such dividends that are paid out of trading profits will in future be chargeable to tax here at the 12.5% rate of corporation tax instead of at the 25% rate. Where dividends do not qualify to be charged at the 12.5% rate, they will continue to be charged at the 25% rate.

Dividend pooling rules are also amended.

The new rules apply to dividends received by a company on or after 31 January 2008.

Close Company Rules

Close company surcharge rules are being amended to allow a company making a distribution and the company receiving it to jointly elect that the distribution will not be treated as a distribution for the purposes of TCA97 s440.

Petroleum exploration and production

Introduction of a new profit resource rent tax on profits from petroleum and gas production in the State. New rates of tax ranging between 5% and 15% will apply to the profits from petroleum and oil production activity depending on the profitability of the oil field.

The new tax will be in addition to the corporation tax rate of 25% which has applied to this activity since 1992.

Tax Incentive for Energy Efficient Equipment

Accelerated capital allowances are being introduced in respect of expenditure by companies on certain energy-efficient equipment bought for the purposes of the trade. The scheme, which will run for a trial period of 3 years, will apply to new equipment in designated classes of technology. Equipment eligible under the scheme will be published in a list established by the Minister for Communications, Energy and Natural Resources (with the approval of the Minister for Finance) and maintained by the Sustainable Energy Authority of Ireland.

Allowances for Know-How

Amendments are being proposed in relation to the tax relief for certain expenditure on “know-how” that is bought by a person for use in a trade to ensure that the legislation operates as originally intended.

It is disappointing to see this relief being tightened at a time when measures should be introduced to facilitate a knowledge-based economy.

Share Buy-Back Costs

An amendment is being proposed to provide that costs incurred by a company in buying-back its own shares are not allowed as a deduction.

Financial Services

Securitisation

Amendments proposed to define carbon credits/carbon permits and insurance/reinsurance polices as financial assets for the purposes of securitisation and to clarify that financial assets held through a partnership interest will be allowed as qualifying assets for the purposes of securitisation

Life Policy: Gross roll-up regime

A gain shall not arise on the happening of a chargeable event under the gross roll-up regime in relation to a life policy where the assurance company has established a branch in an EU or EEA Member State and has received written approval from the Revenue Commissioners that exit tax will not apply.

This exemption will be applied to situations where the life assurance company carries on business on a freedom of services basis or under an equivalent arrangement in an EEA state and the policy holder resides in an EU or EEA Member State other than Ireland. Written approval from the Revenue will also be required.

Investment Undertakings

FA06 made a number of changes to the funds which created excessive administrative burden on the managers of such funds and made Ireland uncompetitive. Proposals for easing the administrative burden are being made.

Technical amendments are also proposed to ensure that the legislation operates as intended in relation to the calculation and payment of the exit tax.

Double Taxation Agreements

Amendments are proposed to deal with the calculation of double tax relief.

• Clarification that a formula introduced in FA06, which calculates the amount of doubly taxed trading income that arises from a payment from which foreign tax is deducted, does not apply to foreign branch profits.
• Extension of the circumstances under which a double tax relief credit is made available to Irish companies in receipt of dividends from foreign companies.

C. Capital Taxes

CGT Retirement Relief

CGT Retirement Relief is being amended to introduce a “motive” text to ensure the relief is not used for tax avoidance purposes.

eStamping

Several sections of the Stamp Duties Consolidation Act 1999 will have to be amended to allow for the introduction of e-stamping of instruments for stamp duty purposes.

Provision is included for Revenue to make Regulations concerning the implementation and operation of the e-stamping system and for the making of an order(s) for the entry into force of the e-stamping system on a date(s) to be determined by the Minister for Finance.

SSs 79, 80 and 85 of the SDCA99

S79 is being amended to prevent group relief being claimed on a transfer of shares to a connected company by a recognised market intermediary whose own purchase of the shares was exempted from duty under section 75 (which is also amended). The change applies to transfers of shares executed on or after 31 January 2008.

S80 is being amended to allow societies registered under the Industrial and Provident Societies Act 1893 to benefit from the exemption. The change applies to instruments executed on or after 1 June 2005.

S85, which grants an exemption from stamp duty in respect of the transfer of loan capital of a company or other body corporate, is being amended to remove the condition that the transfer of the loan capital is redeemable within 30 years of issue and provides that the exemption will not apply if the transfer is linked wholly or partly and directly or indirectly to an equity index. The section applies to transfers of loan capital made on or after the date of the passing of the Act.

Greenhouse gas emissions – Stamp duty

A new section is being introduced which provides for an exemption from stamp duty on the sale, transfer or other disposition of a “greenhouse gas emissions allowance^” as defined in the new section. The exemption applies to instruments executed on or after 5 December 2007.

Repayment Claims – CAT

The issue of the period in which repayment claims can be made is being revised. The amendment ensures that the 4-year time limit for claiming repayments of tax overpaid will run from the date of payment of the tax, where that tax has been paid within the period of 4 months after the valuation date.

Property Registration Authority – CAT

A number of technical changes are being considered to deal with

• Registration of Deeds and Title 2006
  updates references in the CATCA03 which arise as a result of the passing of the Registration of Deeds and Title Act 2006. The amendment applies to applications to register property made on or after 4 November 2006.
• Double Taxation Agreements
  ensures that a Treaty entered into under section 106 of the CATCA03 will have the force of law only after the Government has made an Order and secures the position of the existing Irish/UK Double Taxation Treaty that came into effect in 1978.

D. VAT

Recast of the VAT Act

There are a number of provisions in this section which deal with a recast of the VAT Act in 2009 to align our national VAT legislation with the new VAT Directive 2006/112/EC - the Sixth Directive was recast in 2006.

Medical (Contraceptive) Products

The rate of VAT on non-oral contraceptive products is being reduced from the standard rate of 21% to the reduced rate of 13.5%. [Under EU VAT law it has not been possible to apply a zero rate of VAT to such products since 1 January 1991 .]

“No Show” Deposits Retained

An amendment is being made to the VAT Act to provide that VAT accounted for on a deposit for a supply is refundable if that supply is cancelled and the deposit is retained by the supplier. This amendment is necessary following an ECJ ruling.

Cash Receipts Cases

An amendment is being made to the VAT Act to provide that where a person on the cash receipts basis of accounting grants a discount to a VAT registered person after issuing a VAT invoice in respect of a supply, but fails to issue a credit note to cover the discount, the cash receipts basis of accounting will not apply to that specific supply.

Hire Purchase Transactions Involving Finance Houses in Certain Cases

An amendment is being made so that the provisions in relation to hire purchase transactions extend to goods acquired from other Member States and to second hand means of transport and agricultural machinery supplied on hire purchase. It will ensure that finance houses will be entitled to bad debt relief in the event of default by customers in their payments for any goods financed through hire purchase, regardless of the type of goods involved or where they are sourced.

E. Revenue Powers and Administration

S17

Amendment to s986 to empower the Revenue to amend the PAYE regulations e.g. the collection of tax from the employee rather than the employer in certain circumstances, where the employer has failed to deduct tax.

S124

The new section provides for an authorised officer of the Revenue Commissioners to question suspects in Garda custody, who have been arrested and detained by the Gardai in respect of certain Revenue offences. The offences concerned are serious indictable offences under Revenue law which are “arrestable offences” within the meaning of section (2) of the Criminal Law Act 1997.

S125

Proposal to amend the definition of “authorised officer” in TCA97 s818 (dealing with provisions relating to the residence of individuals) so that all Revenue Officers can make enquiries on residence matters without specific authorisation.

S126

Proposed to amend the definition of “premises” in TCA97 s888 (which is concerned with returns by, inter alia, agents in respect of rental income earned from real property in the State) so as to extend the definition to include real property outside the State.

This means that, if an Irish letting agent is managing a foreign property on behalf of an Irish resident client, details of any rent received must be provided on request to a Revenue Inspector.

S127

The amendments address some anomalies that arise between the general time limits for claims for repayment in TCA97 s865 and CATCA03 s57 and other provisions of these Acts—to make it clear that repayments can be made notwithstanding the provisions of s865: 4-year time limit.

S128

It is proposed to raise the maximum fine allowed for a range of summary offences under the Finance Acts to €5,000.

ICAI Representations Outcome

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

Foreign Dividends

What we sought:

Exemption from Irish tax for foreign dividends, to improve Ireland's attractiveness as a location for FDI.

Outcome:

Foreign dividends subject to Irish tax at 12.5% where the dividends are in respect of trading profits.

Payment of Preliminary Corporation Tax

What we sought:

Extend the Finance Act 2007 rules for computing preliminary tax for smaller companies to all companies.

Outcome:

Eligibility threshold increased from €150,000 to €200,000, thereby bringing many more companies into this useful arrangement.

Thresholds for VAT registration

What we sought:

The VAT registration thresholds should be further increased to the maximum allowable limits.

Outcome:

Thresholds increased to €37,500 for services providers, €75,000 for traders.

Business Expansion Scheme

What we sought:

Re-examine the types of business which are eligible for BES

Outcome:

Recycling Businesses may now qualify without prior grant aid.

Research and Development Relief

Outcome:

Base year for assessing incremental expenditure fixed as 2003 for 4 years.