Budget 2012 follows on from a number of announcements in recent weeks. Of key interest was the publication of the Medium-Term Fiscal Statement on November 4, which provided an insight into the Irish Government’s fiscal plans and targets for 2012-2015.
The statement outlined that the planned budgetary adjustment over the next 4 years is €12.4 billion. €3.8 billion of this adjustment is planned for 2012, the details of which have been confirmed in Budget 2012.
As previously announced, the total 2012 adjustment is split between €1.6 billion of tax increases and €2.2 billion in spending cuts. The revenue raising measures focused on indirect taxes and capital taxes as the Minister for Finance, Michael Noonan emphasised the need to support job creation in the Irish economy.
To that end, the Minister again re-emphasised the important role that exports will play in Ireland's economic growth, introduced a number of targeted incentives and stated that the Government intends to develop and implement further policies to attract foreign investment and improve Ireland’s international competitiveness.
In this regard, the technology sector is of significant importance to the Irish economy, as a substantial part of this export growth is expected to be generated by technology companies based in Ireland both from the MNC sector and from our strong indigenous base.
We have highlighted below the key measures announced in Budget 2012, affecting the technology sector.
Corporation tax regime
Despite having come under significant pressure over the last 12 months, the Minister has once again reaffirmed Ireland’s commitment to the 12.5% corporation tax rate which is the cornerstone of Ireland’s industrial policy and the foundation of the country’s future growth. Allied with numerous tax incentives targeted at the technology sector, such as generous Research & Development tax credits, an Intellectual Property regime and a wide treaty network, Ireland is still very much an attractive location for technology companies to conduct business.
Action: Review your company’s global activities to determine if your organisation is maximising the benefit of Ireland’s corporation tax rate.
Research and development tax credit
The budget contained a number of specific tax incentives which broaden the existing R&D tax credit regime.
Firstly, the R&D tax credit is being amended whereby the first €100,000 in research and development expenditure will benefit from the 25% R&D tax credit on a volume basis. The tax credit will continue to apply to incremental R&D expenditure in excess of €100,000 as compared with such expenditure in the base year 2003.
In addition to this, the current outsourcing rules for R&D tax credits are to be amended. At present, sub-contracted R&D costs are eligible where they do not exceed 10% of total costs (or 5% in the case of sub-contracting to third level institutions). These limits are being increased to the greater of 10% (or 5% as appropriate) or €100k.
These two changes are greatly welcomed and will be hugely beneficial to companies in the technology sector whether the R&D activities undertaken are outsourced or performed in-house. The changes are also particularly beneficial to small and medium sized indigenous technology companies.
Finally, companies in receipt of the R&D credit will have the option to use a portion of the credit to reward key employees who have been involved in R&D. It is envisaged that there would be no additional costs to the Exchequer as the bonus comes from the R&D credit already received by the company and the employee still pays the full tax liability on their other income. Although full details of how the incentive will operate have not yet been provided, this could be a beneficial method of providing a key employee with a portion of the company’s R&D tax credit to shelter part of their employment tax and could prove to be an additional benefit to attract, retain and reward key individuals in the technology sector.
Action: Review the activities undertaken by your company to ensure that all qualifying expenditure incurred is benefiting from the R&D credit regime particularly in light of these positive changes.
The three year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for a further 3 years for companies starting up in 2012, 2013 and 2014. This extension is aimed at encouraging employment creation by rewarding new companies that create jobs.
As indicated prior to Budget 2012, the headline change in taxation was the 2% increase in the standard rate of VAT to 23%. This is effective from 1 January 2012. This measure will have little direct financial impact on technology companies which predominantly deal in B2B transactions, where their customers have full VAT recoverability. Technology supplies to consumers will be impacted by the change, as this VAT increase will hit many of the modern technology essentials such as computers, telephones, texting, internet access and the online social media operators.
The VAT rate applicable when the supply is invoiced is the rate applicable for supplies. Where the sale is made to a business that cannot recover VAT, consideration could be given to bringing about the circumstances necessary for invoicing a supply before the increased rate comes into effect.
The change could result in an unexpected increase in costs to a supplier where the sale is made directly to an individual consumer or a non-VAT registered customer.
Businesses which supply telecommunication services, electricity or gas are protected to some degree from this risk because their services are subject to VAT at the rate applicable when they issue their bills or statements. However, other businesses engaged in the supply of ongoing services can be impacted for the increased VAT rate even though they may have billed their customers before the rate change.
This is because the tax point for VAT on ongoing services supplied to unregistered customers is generally the date of payment by the customer for the services concerned. To avoid paying additional VAT the supplier may wish to issue the bills early so that payment will be received from the customer before the increased rate becomes effective or alternatively to delay issuing it until after the rate change so that it can be issued at the increased VAT rate.
- If you sell to the public or VAT unregistered businesses decide how you wish to approach billing and the rate increase. If you supply ongoing services to your customer remember you may be liable at the rate of VAT in force at the date of payment and not that at time which you billed.
- Ensure your billing system is updated and capable of dealing with the change.
- Check that your contracts and websites are updated for the change.
- Given that systems are required to be updated, it may be an opportune time to ensure your company is correctly charging the correct rate of VAT on its products and is claiming input credits where appropriate.
- You may wish to review the sales model, to confirm that the optimal VAT treatment of your supplies is in place.
Reward and benefits
Special Assignee Relief Programme
In his Budget speech, the Minister announced that he will introduce a Special Assignee Relief Programme (‘SARP’) which will allow multinational companies to attract key people to Ireland. This is something that will be welcomed by employers and employees in the technology industry where international assignees play an important role in the success of the industry.
Over the last number of years following the abolition of the remittance basis of taxation, Ireland had lost its competitive edge, and attracting key talent was a real challenge as a result of the high rate of income tax vis-à-vis other jurisdictions. It is hoped that, when details are published, the programme will provide a significant incentive to encourage a skilled workforce to come to Ireland.
Foreign Earnings Deduction
A new Foreign Earnings Deduction will apply to companies where an employee spends a minimum of 60 days developing export markets in Brazil, Russia, India, China and South Africa. This is a positive initiative for the technology sector which seeks to further support Ireland’s export drive by aiding companies to expand into emerging markets.
Specific details are expected in the Finance Bill. However, it should be noted that a Foreign Earnings Deduction relief programme has existed previously in Ireland before being removed from the end of 2003.
This may give an insight into the intentions of the Minister. Under the previous regime a proportion of employment income relating to workdays spent overseas could be excluded from taxation and the tax paid on this portion of income via the PAYE system could then be reclaimed by filing an appropriate tax return.
Pensions & Equity
Rather than further reducing tax reliefs as anticipated, Budget 2012 introduced changes that will see pensions, based on the Government’s projections, contributing an extra €57m in 2012 and €95m in subsequent years. The most important aspect for employers in the technology sector is the removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions. The other areas of change saw an increase in the imputed income distribution on individuals with ARF holdings greater than €2m from 5% to 6% and the introduction of imputed income distribution liabilities on vested PRSAs consistent with ARFs.
Due to the relatively young age profile of staff in the technology sector, pensions may not be a key consideration for many people, given that share awards can often form a significant part of the remuneration package. Despite the changes over the past year to the taxation of equity awards, the key positive after Budget 2012 is that there is still no employer’s PRSI on share based remuneration. However, you should be aware that grandfathering for employee PRSI purposes has been abolished and employee PRSI at a rate of 4% on the vesting of the share award, or exercise of an option, applies from 1 January 2012 regardless of when the award/option was granted.
Action: Employers should now review their employee remuneration and reward packages in light of recent changes to determine whether the incentives in place are tax efficient and in line with best practice in the technology industry.
People to Contact: For assistance in relation to any issue highlighted above, please contact your local Deloitte advisor.