|Introduction||Corporation tax rate||New start-ups||Innovation, IP and R&D|
|Foreign Earnings Deduction||Special Assignment Relief||Employer taxes||VAT|
|Capital gains tax||Stamp duty||Savings Retention Tax|
On a positive note, the Minister has once again re-iterated the Government’s commitment to maintaining the 12.5% corporation tax rate. In the context of the global economic downturn, and with recent corporate tax increases in countries such as France, it is very positive that the Irish Government continues to reiterate its commitment to maintaining the 12.5% corporate tax rate. The low corporate tax rate is the cornerstone of Ireland’s industrial policy and the Minister has once again provided reassurance to both indigenous companies and multinationals operating in Ireland in relation to the future rate of corporation tax.
The introduction of the Special Assignee Relief Programme, the Foreign Earnings Deduction, the package of measures designed to support the continued success of the financial services industry in Ireland, the enhancement of the R&D credit regime and the extension of the corporation tax exemption for start-up companies are all aimed at incentivising job creation and encouraging enterprise both in terms of domestic business and businesses expanding into new markets. Such measures are essential to build confidence in the economy and to drive growth.
Corporation tax rate
We welcome the Minister’s reaffirmation of Ireland’s commitment to the 12.5% corporation tax rate. This should provide certainty to new and existing companies in relation to the future rate of corporation tax.
The three-year corporate and capital gains 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, rewarding new companies that create jobs. Although this extension is welcomed, there is little evidence to suggest this incentive is having a significant impact on the creation of new jobs.
Innovation, intellectual property and R&D
Over the last number of years, there have been significant improvements to Ireland’s R&D tax credit and intellectual property regimes. The Budget contained a number of specific tax incentives which broaden the existing R&D tax credit regime which should continue to give Ireland’s smart economy a competitive tax advantage in the international arena. The new changes should also provide a boost to small and medium sized indigenous companies engaged in research and development activities.
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). This limit can disproportionately affect smaller companies who may have greater need to outsource R&D work than larger multinationals with greater internal resources. The outsourcing limits for sub- contracted R&D costs are being increased to the greater of 10% (or 5% as appropriate) or €100k.
These two changes are greatly welcomed and will provide targeted benefits to small and medium sized indigenous companies in particular. However, as the R&D tax credit continues to be calculated on an incremental basis (for expenditure over €100k) over a base year of 2003 for all companies, companies who had a significant R&D spend in the base year of 2003 continue to be penalised as they may not be in a position to benefit from R&D tax credits.
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 wouldbe no additional cost to the Exchequer as the bonus comes from the R&D credit already receivedby the company and the employee still pays the full tax liability on their other income. It is not clear how this new incentive will operate and we look forward to the release of further information. This could be a very beneficial way 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.
Foreign Earnings Deduction
A new Foreign Earnings Deduction will apply 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 to further support Ireland export drive by aiding companies seeking to expand into emerging markets, although as of yet it is not clear how this new incentive will operate. We look forward to the release of further detail regarding this new incentive.
Special Assignment Relief
A Special Assignment Relief programme was announced by the Minister although specific details of the relief are expected in the Finance Bill. Such a programme will be welcomed following the various changes in taxation of foreign income introduced in prior budgets which have negatively impacted not only foreign employees working in Ireland but also in certain situations Irish domiciles return home.
While some specific reliefs for foreign employments were introduced in 2009 and subsequently extended in 2010, these had only a limited benefit, proved complicated to operate and did not compare competitively with regimes elsewhere in Europe. Irish domiciles were also excluded from these reliefs.
Following the specific announcement of this new relief programme it is hoped that, when details are published, the programme will provide a significant incentive to encourage a skilled workforce to come to Ireland without introducing overly complicated conditions.
Minister Howlin announced yesterday that the Employers Statutory Redundancy Rebate from the Government is to be reduced not to 30% as expected but to 15%. This reduction in rebate is expected to affect a redundancy which takes place with effect from 1 January 2012.
No transitional details have been announced which may ease the situation where a redundancy has already been initiated and budgeted for but which may not itself be complete before the turn of the year. In addition, the Minister today announced the removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions. Renewable energy projects
The qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects is being extended from 31 December 2011 to 31 December 2014
VAT rate increase and impact on business
The well flagged increase in the standard rate of VAT by 2% has been formally announced. The standard rate of VAT is being increased to by 2% to 23% with effect from 1 January 2012.
On the positive side VAT is generally not a cost which sticks with most businesses. While there can be issues around transition to the new rate which can produce costs for businesses they can generally be managed in a way that the increased rate can be passed on to its
customer without it producing a cost to the business itself.
Ironically, however, there are exceptions and notable exceptions in this case are the banks and financial institutions. While there will be little public sympathy for these institutions bearing extra costs there is nevertheless a downside for the borrowers from these institutions. These new costs will, most likely under pressure from a regulator focussed on ensuring fiscal strength in the banks, have to be recouped by the banks from the bank’s customers with the result that indirectly consumers will bear these costs as well.
The other types of business which can be adversely affected are those supplying to consumers or customers that cannot recover VAT and who cannot recoup the VAT increase by increasing their prices because of market conditions. For these businesses, the increase will put further pressure on already tight margins.
From an export perspective, apart from service businesses exporting to private consumers and service businesses that cannot recover all of their input tax, such as those supplying financial services, there will be minimal impact on exports arising from the VAT rate change. For the two specific categories of business just mentioned the rate change will go straight onto the price of services or reduce the businesses margin by €20 per €1,000 in sales or costs respectively.
Capital gains tax
As expected, from 07 December 2011, the rate of capital gains tax will rise by 5% from 25% to 30%. In an effort to stimulate the property market, the Minister announced a capital gains tax holiday for capital gains arising on the disposal of property acquired between 07 December 2011 and 31 December 2013 which is held for seven years prior to disposal. Further detail on this incentive was not forthcoming today however we welcome the statement and look forward to the publication of greater detail on the properties included in the incentive.
In a surprise move, the Minister has reduced the stamp duty rate applicable to commercial property to a flat 2% rate on the transfer of freehold and leasehold commercial property. The reduction will be effective from 07 December 2011 and is a welcome announcement and one which, combined with the capital gains tax holiday announced today, will hopefully entice investors back into the commercial property market.
This reduction will apply to all other forms of commercial property as well such as stock, goodwill and debtors which may otherwise be liable to stamp duty when transferred. This will benefit those seeking to transfer business assets after 07 December 2011.
Savings Retention Tax
In line with many recent Budgets, the rate of tax on savings has increased with a view to increasing consumer spending and discouraging long term savings. The increase of 3% tax on savings applies to tax on interest (DIRT), tax on returns from life assurance policies and payments made annually or more frequently from investment funds. For payments made by investment funds less than annually, the rate also increases by 3% to 33%. The effective date is for payments or deemed payments on or after 1 January 2012.