16 January 2008

Mr Brian Cowen T.D.

Minister for Finance

Government Buildings

Merrion Square

Dublin 2

Dear Minister

CCAB-I Pre Finance Bill Submission 2008

First of all, can I acknowledge your personal engagement with CCAB-I in the pre-Budget process, and for the hearing given by you and your officials to our suggestions. We were pleased to note that your Budget Statement reflected some of the comments which we had made, in particular in relation to the further enhancement of the Preliminary Corporation Tax regime and R&D. As we commented publicly on Budget evening, the adjustments to the Stamp Duty regime constitute meaningful and imaginative reform.

I am now writing to you on behalf of CCAB-I to highlight a number of other matters arising in the context of your Budget for 2008, which we believe require your attention as the Finance Bill passes through the Oireachtas. These reflect the reality of a tighter budgetary environment than obtained in the last few years. Our focus is on measures which we believe to be revenue neutral, while resulting in useful improvement. Please contact either myself or Brian Keegan, Director of Taxation at the Institute of Chartered Accountants, if you require anything further on any of the matters we are raising. We will follow the progress of the Finance Bill with considerable interest over the next several weeks and wish you well with your work.

Yours sincerely

Marie Barr

Chairperson, CCAB-I Tax Committee

cc	Mr Frank Daly, Chairman, Office of the Revenue Commissioners
	Mr Eugene Creighton, Assistant Secretary, Office of the Revenue Commissioners

Section 1 - Maintaining Ireland as an Attractive Destination for FDI

Holding Company Regime

Relevant Legislation TCA97 s826 and Sch24

The Irish Holding Company regime was introduced in the Finance Act 2004. The regime provided for the exemption from Irish capital gains tax, subject to certain conditions, where a parent company sells shares in one of its subsidiaries. In addition, pooling of tax credits on foreign dividends was also introduced. Ireland is competing with old Holding Company locations such as Luxembourg and the Netherlands, and new locations such as Cyprus and Malta.

While the pooling of tax credits may result in the effective exemption of distributions from tax, it can be unwieldy in a competitive tax environment to persuade international groups that Ireland is an attractive location for holding companies. On this basis, we would strongly recommend that all distributions from foreign subsidiaries be exempt from tax in Ireland. At present only the making of distributions from an Irish subsidiary to an Irish parent is exempt from tax. The substitution of what is frequently an effective exemption with an actual exemption as suggested would have little negative Exchequer impact—in fact we would expect a positive impact overall as more multinationals would decide to locate in Ireland (or for that matter, not leave Ireland) by virtue of a clear exemption policy.

Withholding Tax on annual interest and other payments

Relevant Legislation TCA97 s246 and s238

Section 246(2) provides for a withholding tax at the standard rate on a yearly interest payment. Section 246(3)(h) provides relief from the withholding tax where the interest is paid to a person resident in an EU Member State or in a country with which Ireland has concluded a tax treaty.

There is no relief where the interest payment is made to a person resident in a non-EU/non-treaty country. This may result in double taxation as there is no treaty to provide relief from the withholding tax paid in Ireland.

We would suggest that withholding tax should not be withheld on any payment of yearly interest as the current position leaves Ireland in a non-competitive position, where foreign direct investment may choose another location.

To compound this situation, there is no specific relief from the deduction of withholding tax in relation to royalties and other payments in respect of patents. At present there is only relief where the two companies are in a group. If Ireland is serious about becoming a knowledge-based economy, then the position of withholding tax on royalties must echo the position in respect of interest. We are calling for the complete abolition of withholding tax on royalty payments.

IP Incentives

Relevant legislation TCA97 Part 29

Currently there are different capital allowances regimes available for software and patents; there are also different reliefs available for know how, scientific research, and a tax credit system for R&D spend. There is no relief available for goodwill and other IP assets such as trademarks, brands, etc.

In the context of promoting the knowledge based economy and making Ireland attractive for IP intensive inward investors, serious consideration needs to be given to overhauling this collection of reliefs, in such a way as to provide real incentive, expansion of scope, and some consistency of treatment.

Unilateral credit relief for patent income

Relevant Legislation TCA97 Sch 24

As currently written, Schedule 24 contains pooling regimes for dividend and certain interest income received from foreign jurisdictions The existence of a pooling regime for foreign tax suffered on royalties is a significant lacuna in the schedule. Ireland derives significant income from the technological sector licensing its products to locations in other jurisdictions. If we are to maintain our competitive advantage from a tax perspective on the international stage, then the absence of such royalty pooling should be addressed as a matter of urgency.

Insurance companies and withholding tax

Relevant Legislation TCA97 Sch24

There is a unilateral tax credit relief in respect of interest income from non-treaty countries. The same issue arises periodically in relation to insurance or reinsurance premiums received by Irish insurance and reinsurance companies operating in the international arena.

Given the importance of this sector to the Irish economy, and its continued growth internationally, a unilateral credit similar to that in Paragraph 9D should be introduced for such withholding tax on insurance premiums.

The estimated cost of introducing such a credit would be expected to be negligible as business that attracts such withholding tax is not currently transacted through Ireland, and the existence of such a credit would be an additional string to our bow in attracting such business to Ireland.

Patent Exemption

Relevant Legislation: TCA97 s234

A qualifying patent for the purposes of the patent exemption is one in which “the research, planning, processing or similar activity” leading to the invention which is subject to patent was carried out in an EEA State. Previously, this exemption had been restricted to activities carried on in the State and was accordingly amended in last year's Finance Act. This extension did not go as far as countries with which Ireland has a tax treaty.

Ireland has increased its presence on the international stage over the last number of years and as such, any restriction imposed on treaty partner countries which are not within the EEA does not bode well for the way this country is perceived on the international stage. It is requested that this anomaly be addressed as a matter of urgency.

Section 2 - Improvements in the Business Tax Environment

Business Expansion Scheme

Relevant Legislation TCA97 Part 16

We welcome the announcement in the Budget that grant aid will no longer be a criterion for Business Expansion Scheme (BES) eligibility for recycling companies. The lifting of this requirement for companies which would have been regarded as manufacturing under the “old” 10% rate rules is particularly important.

We would urge that in Finance Act 2008, consideration would be given to removing the grant aid criterion more generally.

Employment grant aid has become a less prevalent element of the industrial environment in recent years. For example, in 2006, IDA Ireland extended such grants to a value of some €25m. However in 2005, the comparable figure was €42m which closely paralleled the 2004 figure. The employment grant criterion is excluding worthy businesses, which would qualify in all other respects, from the relief.

Removing this criterion would also go towards resolving the anomaly of grant aid being restricted under EU State Aid aggregation rules in certain circumstances where BES is claimed.

Foreign Currency Gains & Losses from a Corporation Tax Perspective

Relevant Legislation: TCA97ss79A & 79B

Many companies carrying on a trade in this country use ‘natural hedging’ to reduce a commercial exposure to foreign exchange movements on certain financial assets. Certain tax fragmentation issues arising from foreign currency assets matched with foreign currency liabilities had been addressed in Finance Act 2003 from a capital gains tax perspective (section 79A) and Finance Act 2006 (as amended by FA 2007) in computing the trading income of a company for a particular accounting period (section 79B).

Section 79A allows foreign exchange gains and losses on certain assets to be matched with gains and losses arising on a foreign currency liability. This is defined as including a liability, not being a relative monetary item within the meaning of section 79 or the sum subscribed for paid up share capital or contributed to the capital of the company.

“Relevant foreign currency liability” for the purposes of the matching relief provided in section 79B in computing trading income is more narrowly defined as a liability, not being a relevant monetary item within the meaning of section 79 which arises from a sum subscribed for the paid up redeemable capital of the company. It is unclear why a difference in the meaning of “liabilities” remains between sections 79 A and 79B given that their purposes, as can be ascertained from the respective sections, is similar.

We would therefore suggest that the definition of “relevant foreign currency liability” in section 79B be amended to read similarly with the meaning of “foreign currency liability” in section 79A.

Capital allowances – assets bought and sold in one year

Relevant Legislation TCA97 s288

Section 288(1) provides for the making of a balancing allowance or a balancing charge where certain events occur such as the disposal of plant or machinery. The provision only applies where “ a wear and tear allowance has been made for any chargeable period to a person carrying on a trade”. A wear and tear allowance is available where plant or machinery is in use for the purposes of a trade at the end of the chargeable period.

Therefore, there is no legislative basis for allowing a balancing allowance where plant and machinery is disposed of during the chargeable period in which it was first brought into use.

Where the taxpayer experiences a catastrophic event during the chargeable period which results in the loss of plant or machinery, the taxpayer would be unable to claim a balancing allowance. We recommend that balancing allowances should be extended to allow a claim for plant and machinery which are bought and sold in one year.

Surcharge on the undistributed income of professional services close companies

Relevant Legislation TCA97 s441

CCAB-I has consistently argued that the regime applicable to professional services and investment companies is discriminatory.

Since we moved from the imputation system of tax credits on dividends, there is no correlation between the tax suffered on dividends and the underlying results of a company. It is discriminatory to promote a system which mitigates one form of taxation (the surcharge) by attracting another form of taxation (Dividend Withholding Tax) which have no direct relationship.

The effective rate of tax on investment income for companies (25%) is higher than that which applies to individuals, thereby making redundant an anti-avoidance measure for most types of investment income earned through companies.

A company's after tax profits are taxed on their ultimate extraction to the shareholder normally under standard income tax rules. By obliging the payment of a dividend to avoid the surcharge, the only result is to accelerate the payment of tax. Where income has suffered tax at 25% and is then distributed; taking account of income tax on the shareholder, the tax burden can be up to 55% (ignoring levies). The tax context in which the surcharge was introduced some thirty years ago is now very different. The introduction of self assessment for companies, the introduction of dividend withholding tax, and the bringing forward of preliminary Corporation Tax payments has achieved the acceleration of payment of tax on the profits of companies generally.

From a commercial standpoint, many professionals are obliged to operate through a corporate structure. This can be for insurance or professional indemnity reasons, for example engineers and financial consultants. It can also reflect industry practice—we understand that many of the major software multinationals will only hire contractors through an operating company, rather than engage individuals directly. There should be no particular tax penalty attaching to following best commercial practice.

However, we also recognise that this surcharge regime needs to be seen in the context of a suite of measures which defends the 12.5% rate of Corporation Tax on trading income. It can be regarded as a device to discourage the use of business incorporation solely on tax grounds.

CCAB-I believes that this purpose can be preserved, if deemed necessary, by adding to the mechanisms available to companies to extinguish the amount liable to surcharge. Surcharges in respect of undistributed professional services income can now only be mitigated through the payment of dividends. We feel that capital expenditure by a company should also serve to mitigate the surcharge.

We propose that in computing the surcharge, expenditure by the company on capital assets eligible for capital allowances should be taken into account in reducing the amount of undistributed profit liable to surcharge. This expenditure should comprise the aggregate expenditure incurred by the company in the year of account to which undistributed profits relate, and the following year.

This proposal would resolve one of the main difficulties with the surcharge regime—that it serves as a disincentive for companies to accumulate revenue reserves to contain their levels of borrowing or for future reinvestment in capital expenditure. By linking the abatement in surcharge to the capital allowances system, this new relief would be easy to administer and monitor.

Professional Services Withholding Tax

Relevant Legislation: TCA97 Part 18 Chapter 1

At present, certain foreign professional services providers can claim a refund of PSWT provided they are resident in either an EU country or in a country with which Ireland has a DTA and are not operating as a branch. The administrative process would be greatly simplified if foreign based service providers could avail of an exemption from the withholding tax on provision of appropriate declarations. A procedure with close analogies already operates for Dividend Withholding Tax.

There would be significant commercial advantages for Semi State companies if such a procedure were to be adopted, as there is evidence that the cash-flow and administrative costs of the tax are passed on by foreign providers in the overall cost of contracts.

Section 3 - Necessary Technical Corrections and Improvements

Payment dates

Relevant Legislation TCA97 s958

At present Capital Gains Tax (CGT) must be paid in two instalments:

• on or before 31 October in relation to gains incurred in the initial period (1 January to 30 September);
• on or before 31 January in the following year in relation to gains incurred in the secondary period (1 October to 31 December).

In addition, returns must be submitted on or before 31 October in the following year.

For simplification purposes, we recommend that the CGT return applicable to the CGT payable in respect of the initial period of a year of assessment should be made at the payment date (by 31 October of that year). Conversely, the payment and return for the secondary period should be both made at the following return date (by 31 October of the following year).

CCAB-I recognises that there could be concerns as to Exchequer cash-flows arising from this amendment. We suggest that the balance between cash-flow considerations and administrative simplification could be met through making the simplified arrangement available where the aggregate consideration from disposals in the three month period does not exceed €1,000,000.

Refunds of PRSI to self employed persons on foot of pension contributions

Relevant Legislation SWCA05ss21 and 38

CCAB-I wishes to highlight a significant anomaly in the treatment of self employed persons as against employed persons in the matter of pension contributions.

Where a payment is made either to a Personal Retirement Savings Account, an occupational scheme or a qualifying premium under an annuity contract approved by the Revenue Commissioners, a refund of PRSI is generally available to taxpayers. The legislation governing the repayment mechanism, ss 21(1)(c) and 38 of the Social Welfare Consolidation Act 2005 operate as to prevent a PRSI refund in respect of “reckonable income” (trading income) as opposed to earnings which are subject to PAYE under Schedule E.

In short, an employed taxpayer can claim a PRSI refund where he or she makes a pension contribution, but a self employed person can not. This is inequitable and counterproductive in an environment where all citizens are being asked to make proper provision for their retirement.

We would ask that this PRSI treatment for the self employed be brought into line with the treatment for employed persons.

Relief for professional subscriptions

Relevant Legislation TCA97 s114

At present, employees who pay their own professional subscriptions cannot obtain a deduction from their employment income as the expense is not incurred “wholly, exclusively and necessarily”. Where the employer pays the subscription on the employee's behalf, and the professional subscription concerned is relevant to the employee's work, a deduction is normally available to the employer.

We propose a separate relief for deducting such subscriptions from employment income. We envisage that similar conditions as apply to ensure that a taxable benefit in kind on an employee does not arise where the employer pays the subscription should operate. The main condition is that membership of that professional body is relevant to the business of the employer. Revenue regard “relevant” as meaning that it facilitates the acquisition of knowledge which is necessary for the duties of the employment, or directly related to the performance of the employee's or director's present or prospective duties in the office or employment.

The introduction of such a relief would help to equalize the position of professionally qualified persons in academia and in certain areas of the public service, where relevant subscriptions might not normally be paid by the employer. It would be very much in keeping with Ireland's drive towards becoming a “knowledge economy”.

Relief for fees paid for third level education

Relevant Legislation TCA97 s473A

A generous form of tax relief for individuals on fees paid for undertaking third level education already exists. It is entirely appropriate to provide for such reliefs given the emphasis on developing skills in our economy.

key criteria for the relief are that:

• Fees be paid for an approved course
• The course must be conducted in an approved college

In most instances, these criteria do not give rise to difficulty. Course accreditation is usually granted by the Higher Education and Training Awards Council, and its work in this area is well respected both at home and abroad. However, a separate approval process is required in respect of the course provider. It seems anomalous that one taxpayer attending a HETAC accredited course can obtain tax relief, while another attending a similarly accredited course but at a different educational establishment would be denied it.

As the tax legislation pre-dates the significant reform and advances in the third level sector since the formation of HETAC in 2001, it may be appropriate to review the requirement that the college, as well as the course, be approved.

Holiday cottages

Relevant Legislation TCA97 m 268(3) 352,353

To retain the tax relief, holiday cottages, holiday apartments or other self-catering accommodation may not be let long term. Longer winter or other off season lettings are impossible in practice.

We suggest that the rules governing the letting of holiday accommodation be relaxed for the off-season, while retaining the conditions regarding short term summer season letting. This would:

• Increase the availability of rented accommodation, so reducing localised inflationary effects on rents.
• Help deal with the problems of deterioration of vacant property in the off-season

In order to preserve the intention of the restrictions set out in the legislation, we would propose that rental income from “non-holiday” rentals would not be sheltered by capital allowances, but would not of itself prejudice the availability of capital allowances for holiday lettings.

Registration with the Private Residential Tenancies Board

Relevant Legislation: FA06^s 11 as it amends TCA97

The integrity of our tax system is prejudiced by the use of Revenue powers and Revenue sanctions to police and penalise activities mandated by another arm of the State. FA06 introduces a tax sanction for failure to register with the Private Residential Tenancies Board.

It should be repealed because:

• The requirement for landlords to register residential tenancies is governed by Part 7 of the Residential Tenancies Act 2004, and has been in force for some time. There are sanctions for failing to comply with Part 7. If that sanction is deemed inappropriate, it should be remedied there, not in the tax code.
• FA06 s11 introduced a significant additional administrative burden on taxpayers, concerning rental income deductions and the operation of evidential requirements of registration with the PRTB.
• It is not clear that the changes to the Returns of Income required to implement FA06 s11 are in accordance with the provisions of TCA97 s879(1).

Interest on late payment of tax

The proposal of the Revenue Powers Review Group should be adopted in full by reducing the 12% rate of interest on late payments to 10% for all tax heads.

The reduction of the rate of interest on overdue tax to 10% per annum, introduced in Finance Act 2005 was welcome, but confined to late payments of the Direct Taxes. The lower interest rate does not apply to indirect taxes such as excise duties and VAT and taxes such as PAYE, relevant contracts tax, professional fees withholding tax, DIRT and other withholding and exit taxes which are collected by employers and others on a fiduciary basis.

The 12% rate operating here should now be reduced to 10% also, to ensure equality of treatment for taxpayers.

Relevant Contracts Tax

Relevant Legislation: TCA97 s531

A change in wording in Section 531 is suggested to avoid the situation whereby persons are treated as Principal Contractors due to a remote connection with other Principals.

Technical amendment to s1035A TCA

Section 1035A provides that investment managers will not create a branch or agency for a non-resident by virtue of the activities carried on in Ireland on behalf of such nonresident which is clearly important in relation to the management of non-Irish funds. The section applies to an “authorised agent” which is defined in subsection (1) by reference to certain regulatory legislation and, in particular, the Investment Intermediaries Act 1995 (“IIA”) or equivalent in another EU country.

The legislation governing the regulation of investment firms in Ireland has recently changed as a result of the introduction of the Markets in Financial Instruments Directive (“MiFID”). MiFID was introduced in Irish law through the European Communities (Markets in Financial Instruments) Regulations 2007 (SI 60, as amended by SI 663 and SI 773 of 2007) which came into effect on 1 November 2007 (known as the MiFID Regulations). While the IIA will remain in place (as it continues to apply to certain activities and instruments not covered by the MiFID Regulations), almost all new investment firms will be authorised and regulated under the MiFID Regulations. In addition, existing investment firms authorised under the IIA have received a changeover authorisation to convert them to regulation under the MiFID Regulations.

On this basis, the legislative references included in the definitions in Section 1035A(1) need to be updated both for existing investment firms that were previously regulated under the IIA and for newly authorised investment firms. This is a technical amendment required only to update the tax law for the new legislation governing the regulation and authorisation of investment firms.

Underpaid Corporation Tax in Certain Instances

Relevant Legislation: TCA97 Sch 17A

The summary of budget measures makes the following point: “Transitional arrangements which relaxed the interest charge on underpaid preliminary corporation tax for companies in very specific circumstances for certain companies whose accounts are based on International Financial Reporting Standards (IFRS) will be changed in the finance bill so that these arrangements can be used on a permanent basis.”

It is submitted that this refers to Schedule 17A, Para 4(6) which allows a company to make a top-up payment where the preliminary tax payment made by a company was insufficient due to fair value movements on financial instruments in the last two months of the respective accounting period. However, as currently written, this top-up facility applies for “relevant accounting standards” as opposed to just IFRS. “Relevant accounting standards” include IFRS and Irish generally accepted accounting practice “which are stated so as to embody, in whole or in part, international accounting standards and the application of which would produce results which are substantially the same as results produced by the application of international accounting standards.” It is assumed that the summary of budget matters reference to IFRS is to be regarded as a reference to ‘relevant accounting standards’ for the purposes of Schedule 17A. If this is not the case then it is submitted that such a change would bring significant complexity to already detailed legislation. We would suggest that the budget suggested amendment to Schedule 17A be made for “relevant accounting standards”, as opposed to IFRS purposes.

Investment undertakings

Relevant Legislation: TCA97 s 739G

Section 739G(5) facilitates the use of the CGT-CAT offset for appropriate tax paid as “as a result of the death of a person.” It is unclear why the offset is available only on death. We would suggest that the legislation be amended to additionally cover the situation where appropriate tax is payable as a result of a gift.