I. CCAB-I Pre Finance Bill 2009 Submission

Mr Brian Lenihan T.D.

Minister for Finance

Government Buildings

Merrion Square

Dublin 2

27 April 2009

Dear Minister

CCAB-l Pre Finance Bill Submission 2009

I am writing to you on behalf of CCAB-I to highlight a number of matters arising in the context of your Supplementary Budget for 2009. The matters pertain mainly to policy decisions, in particular the measures that commenced at midnight on 7 April.

I have also written to you under separate cover on measures in relation to intellectual property; and necessary improvements to the new remittance basis.

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.

Yours sincerely

Liam Lynch

Chairman, CCAB-I Tax Committee

cc Ms Josephine Feehily, Chairman, Office of the Revenue Commissioners Mr Eugene Creighton, Assistant Secretary, Office of the Revenue Commissioners

Appendix

Deposit Interest Retention Tax (DIRT) and Taxes on Life Assurance Policies and Investment Funds

The rates of retention tax that apply to deposit interest, together with the rates of tax that apply to (a) life assurance policies and (b) investment funds, were increased by 2 percentage points in each case, i.e. 25% and 28% respectively.

The increased rates applied to payments, including deemed payments, made from midnight on 7 April 2009. We wish to bring to your attention the significant administrative burden that the effective date of midnight on Budget Day, 7 April has placed on financial institutions.

The more general point is that, irrespective of which sector is affected, changes to withholding and fiduciary tax mechanisms take time and money to implement.

Stamp Duty Levy on Insurance Policies

A new levy on life assurance is being introduced at the rate of 1% on premiums. This new levy will apply to premiums received by an insurer on or after 1 June 2009.

This new levy would result in discrimination within the savings sector. Investment vehicles with life assurance elements are in wide use, and compete with more traditional deposit and unitised investments. The new levy fails to distinguish between “pure”life assurance policies and fixed term investments, one component of which is a life assurance benefit.

Restriction in Interest Relief – Rented Residential Property

The level at which interest re-payments can be claimed against tax for residential rental properties is being reduced from the existing 100% to 75%. This measure will apply to both new and existing mortgages.

We wish to express strong opposition to this measure in relation to existing mortgages. Individuals have purchased residential properties with the intention of renting those properties. The deductibility of the interest in calculating the rental income which is subject to tax had been factored in when buying the property and is crucial to the viability of the property investment, particularly in a declining rental market. In addition, the proposed measure will also adversely affect people that traded up since 2007 but are unable to sell their original homes. With rents falling, these individuals rely on 100% relief in order to finance their onerous mortgage repayments.

The net effect of this measure will be either to increase the supply of second hand housing in an already depressed market (as investors will attempt to sell buy to let properties) or increase the rents on residential properties (as investors attempt to recoup the benefit of the tax relief on the interest). On an average property, the loss of tax relief costs the lessor in the order of €100 per month.

There is precedent for the negative effect this measure will have on the property market from the restricted interest relief measures of 1998, which ultimately had to be reversed.

Income and Losses from dealing in residential development land

1. The special 20% rate applied to the trading profits from dealing in or developing residential development land is being abolished. The income will be charged at the person's relevant marginal rates of income tax or the 25% rate of corporation tax.
   This change will apply as regards Income Tax for the year of assessment 2009 and subsequent years and as regards Corporation Tax for accounting periods ending on or after 1 January 2009 (with accounting periods straddling that date being deemed for this purpose to be separate accounting periods).
2. Where trading losses have been incurred from dealing in or developing residential development land in circumstances where, if trading profits had been made, they would have been eligible to be taxed at 20%, and a claim to use those losses has not been made to and received by the Revenue Commissioners before 7 April 2009, the losses from today will generally only be relievable (on a value basis) up to a maximum of 20%. Where any such loss is a terminal loss, the restriction will be implemented by “ring-fencing” the loss.

It is noted that the use of losses against all other income (irrespective of the rate applying to that income) would only be available where a return had been submitted by Budget Day. We see this as a form of retrospective taxation.

It sets a dangerous precedent in our tax system that a relief can be lost even if a timely return can yet be made.

Income levy

There is one area of concern in relation to the changes to the income levy — the table inserted in section 531C of the Taxes Consolidation Act 1997 in respect of the 2009 year of assessment, which may result in emoluments and income received prior to I May 2009 being subject to income levy at the rate which applies from I May 2009.

This measure is a form of retrospective taxation. The particular downside here is that for many employees in our declining economy, income for 2009 will be higher in the first four months of the year than in the last eight. In addition, such a measure results in uncertainty in the tax system which could discourage those individuals that Ireland is trying to attract.

We also wish to highlight that the ceiling at which the mid-tier levy applies will discourage enterprise and affect ultimately employment creation. Also, the additional administrative burden placed on employers to carry out year-end reviews for this levy is placing an unwarranted an unnecessary cost on them, particularly in view of the current economic climate.

“Smart Economy”

We have written to you separately on the remittance basis and incentivising innovation.

In relation to the remittance basis, the submission requests enhancements to the relief, which was introduced in Finance (No. 2) Act 2008, in relation to the extension to individuals from the EU/EEA; the income threshold should be considered in light of the necessary restriction to high income individuals; the disincentive of the increase in effective tax rates; and the non-availability of refunding the income levy element of the taxed funds.

In relation to incentivising innovation, the relevant elements of the CCAB-1 Pre≠ Budget Submission 2009 have been extracted and updated to reflect the current environment. In addition, it is important that Finance/Revenue should consult with the Practitioner Bodies on the new relief for acquisition of intangibles prior to publication of the Finance Bill.

II. CCAB-I Pre Finance Bill 2009 Submission – Intellectual Property

Mr Brian Lenihan T.D.

Minister for Finance

Government Buildings

Merrion Square

Dublin 2

27 April 2009

Dear Minister

Pre Finance Bill 2009 — Intellectual Property

I am writing to you on behalf of CCAB-I to outline some important measures that are required to put Ireland on an even footing with other countries in the area of investment in intellectual property. This letter is part of a series of three letters that CCAB-I is making in relation to the Pre Finance Bill 2009 process.

We wish to acknowledge the announcement in your Supplementary Budget speech of 7 April on the retention of the 12.5% corporation tax rate. You specifically note in your speech that it is a key aspect of your inward investnlent strategy. In our experience, the 12.5% rate is the cornerstone of Ireland's ability to attract and retain foreign direct investment.

However, the cornerstone is not important in itself, but is crucial to the success of the building; it is the first stone set and all other stones are set by reference to it. And so it should be with the 12.5% rate; in order to develop Ireland as a Smart Economy, other worthwhile measures must be added.

On 18 December 2008, An Taoiseach launched “Building Ireland's Smart Economy: A Framework for Sustainable Economic Renewal”. While tax featured prominently in the plan, it was with disappointment that we noted that no new tax initiatives were being deployed and that the plan was little more than a listing of aspects already (or about to be included) in the tax code.

The promises of reform which are needed in the area of Intellectual Property were noted. A comprehensive package of tax measures, comparable to that offered initially for the IFSC, is necessary if we are serious about attracting and developing world class research and innovation.

We welcome the proposal in your Budget speech to introduce a scheme of tax relief for the acquisition of intangible assets, including Intellectual Property as a means of supporting the Smart Economy. We note that your Department, in conjunction with the Revenue Commissioners, is in the process of working on the details of the scheme. We suggest that consultation should take place with the appropriate representative bodies prior to the publication of the legislation giving effect to the scheme. As one of those representative bodies best placed to provide fundamental commentary, we would welcome such an opportunity to consult with the relevant persons.

We would see the Budget proposal on the intangible property scheme as another stone being added. We are a long way from a complete structure. CCAB-I has included a number of measures to develop and enhance the Smart Economy in our Pre Budget Submissions over the past number of years. One such measure deals with attracting highly educated personnel to work in Ireland. While similar to a form of remittance basis, it is profoundly different to the measure introduced in Finance (No. 2) Act 2008. It is important to highlight the disincentive of high income tax rates in attracting such personnel. If rates (or some other form of income tax) become so high, it will be extremely difficult to introduce measures to counteract and hence attract those persons to relocate to Ireland. In addition, the operation of PAYE in full by non-resident employers where treaty relief is clearly available is a disincentive to Foreign Direct Investment locating suitable senior people here in the initial critical start up phase. While relief is provided, it would be helpful if this matter were revisited in the context of the Smart Economy.

For ease of reference for you and your colleagues in preparing the Finance Bill 2009, the CCAB-1 suggested measures have been reproduced in the Appendix to this letter.

If you require anything further on any of the matters we are raising, please contact either myself or Brian Keegan, Director of Taxation at the Institute of Chartered Accountants.

Yours sincerely

Liam Lynch

Chairman, CCAB-I Tax Committee

cc Ms Josephine Feehily, Chairman, Office of the Revenue Commissioners Mr Eugene Creighton, Assistant Secretary, Office of the Revenue Commissioners

Appendix

1. Fiscal Incentives for Highly Skilled Foreign Workers

In order for Ireland to have a knowledge economy, we must strive to have centres of excellence in innovation. Key to establishing, developing and retaining such centres of excellence isa capacity to attract the “top” experts in relevant fields into Ireland. A new strategy is required to allow Ireland compete with its fellow EU Member States and non-EU countries in attracting and retaining the brightest and best.

We recommend the introduction of a new expatriate regime which allows key foreign personnel who are experts in their discipline, and research scientists with knowledge and skills that are scarce in Ireland to receive a tax relief which reflects their contribution to key areas of economic growth.

In the past, Ireland has granted special tax regimes to individuals where we wished to foster a particular activity or expertise — the exemptions in relation to greyhounds and stallions are cases in point. Even more pertinent is the artist's exemption. As a nation, we were not shy about our desire to foster creative artistic activity. Equally we should not be shy about fostering scientific innovation and development.

Nor is there likely to be any EU impediment to Ireland's introduction of fiscal incentives to attract knowledge workers. EU Member States¹ such as Austria, Belgium, Denmark, Finland, France, the Netherlands, Sweden and the United Kingdom operate special tax regimes to this end. Under the EC Treaty, individuals are entitled to move freely for work reasons from one EU Member State to another without suffering discrimination as regards employment, remuneration or other conditions of work or employment². Therefore, an incentive which allows foreign employees to have similar tax allowances to Irish resident individuals should meet the EC Treaty freedoms.

In order to ensure that the regime is not abused, the personnel for which the regime is applicable must be clearly defined. The conditions for eligibility under the regime should be aimed at preventing “tax-shopping”, and ensuring that the arrangement is targeted at highly skilled employees.

While such a relief could take many forms, we suggest that a relief for Ireland should have the following parameters. We identif’ these parameters to ensure that the relief is consistent with existing Government policy, is effective in attracting talented individuals to Ireland while being reasonable, ensures that knowledge is transferred within our economy, and that the relief is not open to abuse.

1.1. Eligible Individuals

Non-domiciliaries holding appropriate post graduate qualifications and Irish domiciliaries with less than two years work experience following their attainment of appropriate post graduate qualifications. Post graduate qualifications are those to HETAC level 10 standard, or of a comparable standard where attained in other jurisdictions.

Appropriate post-graduate qualifications should be defined as those within the disciplines identified in The Strategy for Science, Technology and Innovation 2006–13 which forms a pillar of the National Development Plan, namely:

• World Class Research
• Enterprise
• Agri-Food Research
• Energy Research
• Marine Research
• Geo-science
• Health research
• Environment Research

The individual works either as a leader of, or otherwise part of a team, in either a private or public enterprise, in an activity related to their discipline.

The individual is required to work not less than 70% of their time within the State and be Irish resident for tax purposes.

The individual is required to spend not less than 20% of their time engaged in one or more of the following:

• Teaching
• Training or lecturing
• Coaching, team leadership or otherwise acting as a tutor
• Writing, setting or moderating examinable materials in connection with courses of education leading to a post graduate qualification

1.2. The Relief – Individuals

The basic relief should take the form of a deduction from total income in an amount equivalent to 30% of income assessable under Case II of Schedule D or Schedule E.

A further deduction from total income, not exceeding 10% of income assessable under Case II of Schedule D or Schedule E should be available in respect of:

• Costs arising from their relocation to Ireland
• Dependent children's education costs

For Capital Acquisitions Tax purposes oaly, the individual will not be regarded as resident or ordinarily resident in the State.

The relief should run for a period of five years from the end of the year of assessment during which the individual arrives in the State; for the sixth year at 50% of the available relief; for the seventh year at 25% of the available relief, and not available thereafter.

The relief should not be a specified relief for the purposes of computing the Limitation on Amount of Certain reliefs used by High Income Individuals.

The relief should only be granted to an individual once, and only be available for an uninterrupted period of residence within the State. If the individual ceases to be resident for tax purposes during the timespan of the relief, the unexpired portion should not be available to him or her in subsequent years.

1.3. The Relief – Groups

A 12.5% rate of taxation should apply to any bonuses taxable under Schedule E paid to innovators, researchers, developers, who are associated with appropriate innovations, whether in particular educational institutions or in commercial enterprises.

This rate would apply to all directly involved in a creative or research capacity (as distinct from a management capacity) in the innovation process.

Appropriate innovations would have the following characteristics, being

• A recognised and separately identifiable body of work in furtherance of the disciplines identified in The Strategy for Science, Technology and Innovation 2006–13
• “Recognised and separately identifiable body of work”, in this context could be defined as:
  • a patent registered in not less than two OECD countries, or as
  • a peer reviewed and published item of research in an established scientific journal, where the peer review had been done by respected academics from an internationally recognised educational institution.

1.4. Reform of the Patent Income Regime

The recommendations at 1.2 and 1.3 are designed to help ensure that highly skilled people in areas compatible with National Policy are offered real incentives to work in Ireland and raise the Irish skill set overall by developing their innovations in Ireland. To achieve the same ends, we believe that the existing Patent Income exemption regime needs some reform.

We recommend that the current regime should be maintained as at present. However, a further refinement could be instituted whereby dividends can be paid to shareholders who are directly involved in the innovation process (as with the bonus recommendation at 4.5.3 above). Such dividends would be subject to a 12.5% withholding tax rate, with that tax constituting the final liability.

This approach will be attractive in the commercial environment where the remuneration for an innovator and their team can be directly linked to the commercial return being made from their underlying work. However it would not be sufficient to implement this measure on its own, as this would be to the detriment of innovation within the public, and in particular, the university sector.

1.5. Value for Money

Over the lifetime of the National Development Plan the State will invest €6.1 billion in Science and Technology Innovation. Fundamental to the success of this initiative is securing the appropriate knowledge and skill sets.

There is no Exchequer cost with this proposal in relation to the knowledge workers we would attract in — there would in fact be an Exchequer gain in that they would pay some income tax.

If the scheme we propose is successful in retaining 1,000 top class and re-focussing Irish individuals, the cost in terms of tax and PRSI, based on an average allowance of €40,000 per annum, wouid be in the order of €17m in a full year. Over the remaining life of the NDP, the cost would be approximately € 100m — a tiny fraction of the STI commitment in the NDP.

2. Expand scope of tax reliefs across all IP assets

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.

In the context of promoting the knowledge based economy and removing disincentives for iP intensive inward investors, we recommend overhauling this collection of reliefs in such a way as to provide real incentive, expansion of scope and consistency of treatment. This wouid not preclude tailored allowances towards activities deemed more favourable to the Irish economy, for instance copyright and pharmaceutical patents.

Such a measure will bring Ireland into line with the approach taken in other EU Member States.

3. Withholding Tax on annual interest and other payments

TCA97 s246(2) provides for a withholding tax at the standard rate on a yearly interest payment. TCA97 s246(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 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. There are withholding tax issues on interest payments to group companies in non EU/non treaty countries. In addition, there is no interest deductibility in Treasury companies paying interest to non EU/non treaty countries. These measures are in contrast with the position for example in the Netherlands, Luxembourg and Germany which don't impose withholding tax on interest.

The measure introduced in FA07 which sought to address the issue, failed to deliver the required result. FA07 distinguishes between ‘short’ interest and annual interest. It provided an option to deduct annual interest with a treaty protection to avoid withholding tax but no solution for non-EU/non-treaty countries for withholding tax on interest. No solution was provided to allow ‘short’ interest to be deducted.

We suggest that withholding tax should not be applied on any payment of annual interest or short’ interest; and full deductibility of all trade interest for the financial services trade of a treasury company, again covering annual interest and ‘short’ interest, as the current rules leave Ireland in a non-competitive position, where foreign direct investment may choose another location.

To compound the above 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 (as defined). 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.

III. CCAB-I Pre Finance Bill 2009 Submission – Remittance Basis

Mr Brian Lenihan T.D.

Minister for Finance

Government Buildings

Merrion Square

Dublin 2

27 April 2009

Dear Minister

Pre Finance Bill 2009 – Remittance Basis

This letter is part of a series of three letters that CCAB-I is making in relation to the Pre Finance Bill 2009 process. Such is the importance that we attribute to the remittance basis that we have decided to write to you separately on this issue to outline some important changes which are necessary to improve the attractiveness of the remittance basis which was introduced in Finance (No. 2) Act 2008.

The reintroduction of the remittance basis is welcome within the overall structure of Ireland as a Smart Economy. However, the relief, as it currently stands is limited in its attractiveness.

Section 13 of Finance (No.2) Act 2008 introduced a form of “remittance basis” by Inserting section 825B into the Taxes Consolidation Act 1997. The key aspects to the new relief include:

• The relief is in the form of a refund of tax paid, rather than an exemption from paying tax
• The refund is restricted to tax due on the greater of emoluments remitted/received in the State; and €100,000 plus 50% of the emoluments remitted/received in the State which are in excess of €l00,000
• The employee must have been resident in a Tax Treaty country which is not a party to the EEA agreement, prior to becoming resident in the State
• Employee was employed by a company in that country, i.e. a Tax Treaty country which is not a party to the EEA agreement

The purpose of introducing a form of remittance basis is to attract individuals at the higher end of the value chain to temporarily relocate to Ireland. It is understandable that a limit be placed on the level of remuneration below which the relief cannot apply. However, this limit should relate to the application of the relief and not the level of relief available, i.e. once the individual meets the remuneration requirement, all remuneration not remitted/received in the State should be relieved.

The relief as it stands is limited to those individuals who lived and worked in a country outside the EU. This condition makes the relief, and hence Ireland, difficult to sell in a global economy with multinational organisations that view Ireland and the EU as one and the same. The relief should be extended to all countries with which Ireland has a tax treaty.

If you require anything on the above, please contact either myself or Brian Keegan, Director of Taxation at the Institute of Chartered Accountants.

Yours sincerely

Liam Lynch

Chairman, CCAB-I Tax Committee

cc Ms Josephine Feehily, Chairman, Office of the Revenue Commissioners Mr Eugene Creighton, Assistant Secretary, Office of the Revenue Commissioners

1. Trends in International Migration, 2004 edition

2. OM(2006) 728 final “Towards a more effective use of tax incentives in favour of R&D”