I. Remittance Basis

One of the amendments re-introduced the Remittance Basis. The provisions have a familiar ring, in that they codify the pre 2006 remittance basis approach, but there are significant terms and conditions. Notably also, the relief will be given by way of refund.

The individual must be Irish resident for a period of at least 3 years, though the refund can apparently be claimed annually from the commencement of the residency period. Revenue can claim back tax repaid if this 3 year rule is subsequently breached.

As was always the case, the individual must be resident but not domiciled. Prior to arriving in Ireland (and this is a significant difference) he or she must have been resident outside the European Economic Area, but in a DTA country. They must be employed by a company established outside the EEA, but in a DTA country and paid from abroad.

At the end of every tax year the individual can opt to be taxed on the greater of their remittances and €100k plus 50% of any further emoluments. An executive earning €150,000 but who remitted €100,000 would therefore be taxed on €125,000, rather than on €150,000.

Remittances are very tightly defined. The new regime applies from 2009.

II. Income Tax Changes

The amendments feature changes to the scope of the Income Levy, the Residency Test and Film Relief.

Income Levy

The amendments feature changes to the scope of the levy – primarily that foreign source Deposit Interest will be unscathed (as is the case with Irish source Deposit Interest). Also, tax deductible Maintenance Payments will be recognised as deductible for levy purposes.

Residency – Overnight Rule

A technical amendment clarifies that the new rule governing what constitutes a day for the residence test will only take effect for years of assessment after 2008.

Film Relief

Important changes increase the allowable percentage of a film investment from 80% to 100% and the allowable amount from €31,750 to €50,000.

Preferential Loans

The rates at which loans are treated as preferential are being reduced – from 5.5% to 5% for home loans; and from 13% to 12.5% for other loans.

III. Appealable Penalties

There was a substantial change to the Appealable Penalties regime in the Committee Stage Amendments.

Even the Committee Stage Amendments proposed to Schedule 5 of the Finance (No.2) Bill needed two attempts to get it right, with additional amendments amending earlier additional amendments. This is worth highlighting, not in any way to criticise the drafting staff involved, but to emphasise just how complex this legislation is.

The main change concerns the definition of “Unprompted Qualifying Disclosure” and can be found in the second additional list of amendments published on 9 December. It concerns the timing of the Unprompted QD, which can now be made: “where the person is notified by a Revenue officer of the date on which an investigation or inquiry into any matter occasioning a liability to tax of that person will start, before that notification.” This may address one of the issues highlighted in our eNews of Monday 8 December, which was whether Revenue could still generally announce that they are embarking on a special investigation like the Deposit Accounts investigation without denying the possibility of Unprompted QD's being made.

It's worth reviewing how things are proposed to stand now in comparison with existing arrangements under the Audit Code of Practice. Taxpayers made qualifying disclosures for three pragmatic reasons – penalty mitigation, non publication and non prosecution. As well, of course, as a desire to put matters right.

In relation to penalty mitigation, arguably the position is enhanced by virtue of the five year rule in Schedule 5, which resets the penalty mitigation clock.

In relation to non-publication, for all practical purposes, a dispute over the level of penalties to be applied or collected can bring the case into the public arena because the matter has to be resolved in open court. This is irrespective of the amounts involved or the seriousness of the default. The legislative distinctions between whether a case is published in Iris Oifigiuil or in a local paper are really neither here nor there – bad news travels.

And it can travel far. At the moment, Revenue exchange information with other State agencies for enforcement purposes, but within an understanding that any information being passed across which they received under a QD is identified as such. The logic behind these arrangements is that if one arm of the State, Revenue, received information in circumstances whereby they wouldn't pursue prosecution, another arm of the State is also unlikely to do so. But what happens if the QD comes to light in open court? Can for example the Office of the Director of Corporate Enforcement treat such QD information differently?

In relation to non-prosecution, it's really impossible to know at this point. The assurance that on receipt of a QD, Revenue would not pursue a case with a view to a prosecution is contained in the Code of Practice. This is an administrative arrangement, made under Revenue's Care and Management powers. It is not legislated for. On the enactment of Finance (No.2) Bill 2008, the Code of Practice will surely fall defunct – it would be difficult to sustain a set of administrative arrangements some of which will be at right angles to what has been passed by Oireachtas Eireann. If this is the case, the assurance of non-prosecution can no longer be relied upon.

Both taxpayers and the profession need urgent clarification in relation to these matters. Schedule 5 to the Finance Bill is disruptive to established and well understood procedures – this is why we had called for its introduction by way of commencement order, to enable the administrative practices to be resolved prior to its implementation. This particular matter was raised by TD's at Committee Stage. The Minister seemed firmly of the view, not so much that its introduction might not be delayed but that a specific implementation date was required – “the insertion of a commencement order would lead to difficulties in that persons currently in negotiations would not be able to take their chances in court. There has to be a specified date for the commencement of the Schedule.”

Deputy Kieran O'Donnell (himself a Chartered Accountant) pursued the matter further, and asked the Minister to offer an assurance that this will not be given effect until the various consultations have taken place. The Minister gave an undertaking that reasonable consultations will take place with the profession. “This will not come into operation for an individual taxpayer for several months because of current practices.”

IV. Restricted and Forfeitable Shares

Two new sections were introduced to the Taxes Consolidation Act 1997 – one which deals with the acquisition by a director or employee of restricted shares and the other which deals with the acquisition by a director or employee of forfeitable shares. The two new sections will apply to shares acquired on or after 20 November 2008.

Restricted shares

The income tax charged on the market value of the shares (without taking account of the restriction on the shares) is reduced by a certain percentage which depends on the period of restriction – 10% for 1 year; 20% for 2 years, up to 60% for more than 5 years. This provision will allow for the ease of computation of relief when dealing with restricted shares rather than trying to calculate the actual market value of the restricted shares.

Restricted shares, as the name suggests, refer to shares where there is some sort of restriction on the freedom of the shareholder to dispose of the shares for at least one year. The restriction must be in the form of an agreement in writing. Where the director or employee accepts an offer in a share-for-share deal; disposes of the shares in a transaction affecting all ordinary share capital or a general offer where the person acquiring the shares will have control of the company, then the shares are still treated as restricted. During the restricted time period, the shares must be held in trust.

At any time within the restricted period, if the restriction is removed, then there will be a clawback in the income tax reduction in proportion to the restricted time period remaining.

When the shares are subsequently disposed, any charge to income tax will be taken into account for the purposes of capital gains tax.

Forfeitable shares

In this case, the full charge to income tax must be paid, i.e. taking into account the market value of the shares, at the time of acquisition. Where the shares are subsequently forfeited, there is provision for the repayment of the income tax paid. The director/employee has 4 years from the end of the year of assessment in which the forfeiture takes place to make a claim.

In summary, forfeitable shares are those shares where there is a written agreement or contract whereby the owner of the shares ceases to hold the beneficial interest in the shares and not entitled to receive consideration for the shares in excess of the amount they paid for the shares.

Both sections contain bona-fide commercial and anti-avoidance provisions.

V. New Incentive to invest in High Tech ventures

This amendment introduced a new relief whereby specific profits from certain investments are treated as chargeable gains and taxable at the reduced rate of 15% (for partnerships) or 12.5% (for companies).

The purpose of the relief is to encourage investment in research, development or innovation. R&D activities take the meaning from the R&D credit provisions. Innovation means development of new technological, telecommunication, scientific or business processes.

The investment must be in a private trading company which has set up a new research, development or innovative business. The business must be set up and commenced on or after 1 January 2009. The investment must be in the form of unquoted shares or securities which remain in place for at least 6 years.

The special rates apply to profits of the investment which are in excess of those profits which have been agreed as part of the initial rate of return. In addition, those profits cannot exceed 20% of the total profits paid by the investment.

VI. Know How

This section replaces TCA97 s768(3) which had been introduced by the first Finance Act of 2008. That Act had introduced anti-avoidance provisions, including Subsection 3 which had provided for the non-deductibility of expenditure on know-how where a trade had been acquired, but the know-how in that trade had been acquired by a person connected with the person who acquired the trade.

The new Subsection 3 further tightens the availability of know-how in a variety of connected party transactions.

Firstly, where a person acquires a trade or part of a trade, and a person connected with that person acquires the know-how, then the expenditure incurred on the know-how is only available to the extent of profits of the trade carried on by the person who had acquired the know-how, i.e. it is not available against other income or profits. The excess expenditure on the know-how can be carried forward to later accounting periods.

In addition no royalty or other payment paid by the person who acquired the trade, in respect of the use of the know-how is allowed in calculating the profits of that trade; or treated as a charge.

If the trade acquired by the first person is subsequently acquired by the person who had acquired the know-how, then there is no deduction of the know-how expenditure in relation to that trade.

A new Subsection 6 provides for the withdrawal of the relief where it is subsequently found to have been claimed incorrectly.

VII. VAT on Company Cars

The Committee Stage Amendments have introduced a partial input credit for VAT on company cars. The amount of input credit available is 20% of the VAT charged.

The credit is in respect of purchase, hiring, intra-Community acquisition or importation of a qualifying vehicle. The car must have been first registered after 1 January 2009 and meet specific emissions standards. The car must be used primarily for business purposes, i.e. at least 60% of the use.

There will be a clawback of the VAT claimed if the car is disposed within 2 years or if it ceases to meet the 60% test.