Finance Act 2012: Impact on the technology sector
As expected, the Finance Act introduces a number of changes to improve Ireland’s attractiveness as a place to do business for multinationals and particularly those in the technology sector.
A number of initiatives which had been announced in the Budget are included in the Finance Act such as the expansion of the existing R&D tax credit regime and an extension to the three year tax exemption for start-up companies. Additional improvements have also been made to the provisions relating to group loss relief, taxation of foreign dividends and foreign tax relief for foreign royalties. Further details in relation to the Special Assignee Relief Programme and the Foreign Earners Deduction have also been announced and they should assist technology companies in attracting key talent.
The Finance Act continues the process of balancing incentivisation and revenue raising measures and provides a number of new measures designed to assist with job creation and foreign expansion by Irish based technology companies.
We have highlighted below the key measures introduced in Finance Act 2012, affecting the technology sector.
Corporation tax regime
The Act makes no amendments in relation to Ireland’s 12.5% corporation tax rate, thus confirming the Government’s determination on this issue.
Research & Development
The 2012 Budget introduced proposed changes to Ireland’s R&D tax credit scheme. These changes were viewed very positively by small and medium enterprises and assist in attracting and retaining talent in R&D activities in Ireland. The Finance Act has provided the detail on how the Budget proposals will be implemented and set out some further, more subtle, adjustments to the legislation.
The Finance Act has introduced a relaxation of the incremental nature of the scheme by removing the first €100,000 per annum of qualifying spend from being referenced to the base year of 2003. This is a positive step to address concerns relating to the relevance of the 2003 base year as time progresses and greatly assists smaller technology companies.
An additional key change is the relaxation of the restriction on sub-contracted R&D expenditure. Where a company pays an unconnected third party to carry out R&D, the qualifying expenditure is to be the greater of €100,000 or the existing 5% and 10% of total internal R&D qualifying expenditure.
Both of these new features to the scheme are clearly focused on assisting the smaller technology companies improve their financial position and to invest in future technology. These changes are relatively straight forward and will be easily accommodated in practice.
Some further detail contained in the Finance Act introduces some restrictions in relation to payments to or from third parties for carrying out R&D activities. Claimants must consider the points below when making their R&D claims and as such may have to update their methodology or take additional steps to comply with the legislation:
- The requirement on the company to notify the sub-contractor that the payment is subject to an R&D tax claim and that this will preclude that company from making a claim in their own right for that work. This may have the effect of reducing R&D claims in companies which to date have undertaken and claimed R&D,
- The Act excludes any payments to third parties for R&D activities which are not classified as sub-contracted R&D. For example, a payment for a specialist test which is not an advance in science or technology in itself will no longer be claimable as R&D expenditure,
- Expenditure met by the State or grant funding which does not qualify for relief has been extended to State or grant funding from other Member States.
A further change enables a company to surrender R&D tax credits to key employees. This will enable companies to reward employees who have in excess of 75% of their duties relating to qualifying activities and that 75% of their emoluments qualify, to reduce their personal income tax liabilities to a minimum of a 23% rate. To be eligible for this reward there are some additional conditions to be met:
- The employee must not be a director nor have, or be connected to a person who has, a material interest in the company,
- The company must have made the PAYE payments to Revenue for the employee, and
- The amount of credit that can be surrendered must not exceed the corporation tax of the accounting period which would be chargeable, if no claim were being made.
Although the above restrictions place some limitations on the scale of the benefit and the number of personnel who can avail, the potential reduction in the rate of income tax up to 18% for an individual is a highly attractive mechanism for reward and recognition.
The changes will take effect for accounting periods starting after 1 January 2012, except for the introduction of the increased limit for sub-contracted expenditure which will apply to periods ending after 1 January 2012.
In summary, the changes are a reflection of the positive approach the Government is taking towards the R&D tax credit scheme and a number of technology companies are expected to benefit greatly from the changes. Companies with large and complex claims should ensure that their 2012 R&D tax credit claim process takes some of the more subtle changes into consideration.
New start-up companies
As was indicated in the Budget in December, the three-year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for another 3 years for companies starting up in 2012, 2013 and 2014. This change is aimed at encouraging employment creation. However there is little evidence to suggest this incentive is having a significant impact on the creation of new jobs.
Group loss relief
A welcome extension of group loss relief has also been announced. The definition of a group has been extended so than an Irish resident company can now surrender losses, charges etc. incurred after 1 January 2012 to another Irish resident group company, where the companies are members of the same group and the Irish companies’ parent is a company resident in a treaty country or listed on a recognised stock exchange. Previously, the Irish companies needed to be part of an EU group of companies. This widening of the definition of a group will make it easier for Irish group members to access losses from other Irish group members.
Treatment of Foreign Royalties
Irish legislation has contained beneficial provisions for the pooling of excess tax credits arising on foreign dividends and on foreign interest income for a number of years. However, excess tax credits arising on foreign royalties could not be pooled and used to reduce the overall tax liability arising on other foreign royalties.
The Act has enhanced the benefits of foreign tax relief with respect to the taxation of foreign royalties. Where relevant royalties are received as part of trading income on or after 1 January 2012 from persons not resident in Ireland, any unrelieved foreign tax on those royalty streams can be used to reduce the income arising from other foreign royalties in the same accounting period.
Although it would have been more beneficial if a system of pooling of credits had been introduced, overall this amendment is welcome and further boosts Ireland’s attractiveness as a location to manage intellectual property.
Treatment of Foreign Dividends
The Finance Act amends the definition of “relevant territory” in relation to the taxation of foreign dividends received by companies within the charge to Irish tax. Where the dividend is received from companies that are resident in a “relevant territory”, and where such dividends that are paid out of trading profits, they will be chargeable to tax in the State at the 12.5% rate of corporation tax instead of the 25% rate.
The definition of “relevant territory” currently includes EU Member States or countries with which Ireland has a tax treaty in force or signed. It has been extended, with effect from 1 January 2012, to include territories the government of which has ratified the Convention on Mutual Assistance in Tax Matters. The convention is a multilateral agreement which promotes international co-operation on tax matters while respecting the rights of taxpayers. There are currently 32 countries that have committed to the Convention.
The Act confirms the VAT rate changes announced in the budget with the standard rate increasing from 21% to 23% from 1 January 2012.
Special Assignee Relief Programme
During the Budget statement last December specific reference was made to a new Special Assignment Relief Programme to attract key personnel to Ireland. The first step in this process covered in the Act is the removal of an existing relief which had been available over the last few years to certain foreign employees working in Ireland. The existing relief which partially re-introduced a limited remittance basis of taxation for certain foreign employees, is removed for new employees with effect from 1 January 2012. For employees engaged before this date, the old relief will continue to be available for a maximum of 5 years as follows:
- If first year of entitlement was 2009 – relief is available up to and including 2013
- If first year of entitlement was 2010 – relief is available up to and including 2014
- If first year of entitlement was 2011 – relief is available up to and including 2015.
The new relief is available for those arriving between 2012 and 2014 and is welcomed in that it will encourage new workers (or returning workers who have been outside Ireland for at least 5 tax years) to come to or return to Ireland. Specifically while a number of conditions apply in order to obtain the relief it is not limited to either foreign employments or non-Irish domiciles. Clearly this is designed to encourage the Irish Diaspora to return home and help the economic recovery.
Subject to conditions the relief is available for 5 consecutive tax years.
In its basic form the relief will allow a relevant amount of compensation otherwise liable to tax in Ireland to be excluded from tax. The relevant amount is valued at 30% of compensation between upper and lower thresholds (€500,000 upper and €75,000 lower).
In determining whether an individual is entitled to the relief, the amount of compensation excluding:
- Benefits in kind including company cars and preferential loans,
- Termination/ex-gratia payments,
- Bonus payments whether contractual or otherwise,
- Stock/Equity Options, and
- Other share based remuneration must exceed €75,000.
For example an individual coming to Ireland for the first time with a basic salary of €200,000 and assuming all other conditions are met would be entitled to have their taxable income reduced for that first year by an amount of €37,500 (€200,000 minus €75,000 @ 30%) thereby generating a tax saving of €15,375 i.e. €37,500 @ 41%.
The relief is however only for income tax and does not apply for the Universal Social Charge.
Additional conditions apply for both the employee and the employer in order to obtain the relief and care will need to be taken to ensure that the detailed conditions are adhered to including the tax residence position of both the employee and employer (or associated employer) at various points. The relief is specifically designed to complement Ireland’s Double Taxation network and countries with which Ireland has a tax information exchange agreement.
On a positive note it is possible for employees and employers to obtain relief through the PAYE system so that the relief can have an immediate impact rather than waiting until the tax year end to make a claim. Employees making a claim however will automatically become chargeable persons for the year of claim which will result in a requirement to file tax returns.
Employers will also have a reporting requirement to Revenue for various details surrounding such employee claims.
Employees will however have to take care before making a claim to ensure the relief provides the best tax answer for them as making a claim will negate other possible claims which may reduce tax e.g. a Foreign Earnings Deduction, Trans-border Relief, R&D incentive and possibly the limited remittance basis that still exists.
Finally, in addition to the exclusion of a relevant amount from tax an employer will also be able to bear the cost of certain items for a relevant employee without creating an addition tax cost.
These include the cost of one return trip for the employee and family to the overseas country they are connected with as well as Primary and/or Post Primary School fees of up to €5,000 per annum per child where the school has been approved by the Minister of Education.
Overall the new relief has to be seen as a positive step in encouraging new employees to move to Ireland and specifically to encourage the Irish Diaspora to return.
Foreign Earners Deduction
The Act re-introduces, in a limited form, the Foreign Earnings Deduction. A deduction will be available for employees working temporarily overseas in the BRICS countries (Brazil, Russia, India, China and South Africa). The deduction is subject to a maximum claim of €35,000 and shall apply for the tax years 2012, 2013 and 2014.
In order to receive this deduction the employee must spend at least 60 days working in a BRICS country in a tax year or in a continuous 12 month period. These “qualifying days” must form part of a period of at least 4 consecutive days spent working in the BRICS country.
The deduction does not apply to employees paid out of the public revenue of the State e.g. civil servants, Gardaí and members of the defence forces or individuals employed with any board, authority or similar body established by or under statute.
The deduction is calculated based on the amount of time spent working in the BRICS country and is calculated according to the following formula:
- D is the number of qualifying days in the tax year,
- E is the net employment income in the tax year (including share awards and share option income but excluding benefits in kind, termination payments and restrictive covenants), and
- F is the number of days in the tax year that the individual held the office or employment
An example of how this deduction works is as follows. An individual who is tax resident in Ireland spends 120 qualifying days working in Brazil. The employment income for the year amounts to €100,000. The Foreign Earnings Deduction is calculated as follows:
|Total employment earnings||€100,000|
|Less: Specified Amount (120*X €100,000) / 365||€32,877|
The deduction is claimed at the end of the tax year when making an annual return of income for that year. A deduction will not however be claimable where another relief is claimed by the employee e.g. split year relief, Trans-border Relief, Special Assignment Relief Programme, R&D Incentive and the limited remittance basis that still exits.
PAYE Withholding on Share Remuneration
The Act amends the PAYE legislation to provide that an employer can withhold, and sell, sufficient shares to cover the PAYE applicable to share remuneration. This is permitted where the employee does not otherwise provide the employer with the funds to pay the PAYE due. Many share plans provide that the employer can withhold shares to cover withholding which the employer is legally obliged to apply. However this amendment is a welcome one for those companies where the plans may not have included such a provision.
Employment Investment Incentive Scheme & Business Expansion Scheme
The Employment and Investment Incentive Scheme (EIIS) came into effect on 25 November 2011 and is due to replace the Business Expansion Scheme (BES). The scheme was subject to State Aid approval by the European Commission and approval was granted subject to certain amendments to the EIIS legislation.
Previously, in order to qualify for the relief, the relevant trading activities had to be carried out principally in Ireland. However, as a result of the amendments, the relevant trading activities must now be carried out from an Irish fixed place of business. Thus trades which are not principally carried out in Ireland but which have an Irish fixed place of business may now qualify for the relief.
In addition, the Finance Act provides that where shares are issued after the 25 November 2011 but before 31 December 2011, the shares are still eligible for BES relief where an election to that effect is made to the Revenue.
People to Contact: For assistance in relation to any issue highlighted above, please contact your local Deloitte advisor.