| Introduction | Corporation tax rate | Savings retention tax | Research and development credit |
| Start-up exemption extended | Indirect taxes | Employee taxation | Stamp duty |
| Capital taxes |
Introduction
We welcome the comments by the Minister today in reaffirming the government’s support for the Irish International Financial Services industry and the 12.5% corporation tax rate. The Minister acknowledged the significant contribution that the International Financial Services industry makes to the Irish economy with 30,000 jobs and €1bn in tax per annum. Indeed the industry has been one of the great export success stories and the Government’s strategy and commitment in this area is clearly outlined in its document which issued in July focussing on the period 2011 to 2016.
In his Budget speech today, 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 Irish International Financial Services 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.
He also outlined that a package of measures will be included in the Finance Bill to support the continued success of the international funds, corporate treasury, international insurance and aircraft leasing industries.
Possible changes being considered by the Minister and his department may include:
- The introduction of additional tax efficient international fund structures to allow for the holding of alternative investment assets including ‘green’ investments, private equity investments, infrastructural investments, distressed debt investments and other emerging market investments
- Enhancements to the tax regime to encourage investment managers to locate in Ireland including incentives in the areas of research and development and intellectual property reliefs
- Relief from interest withholding tax for companies in the corporate treasury business in relation to payment of interest to related parties
- Measures to encourage insurance companies to expand their business outside of Ireland, including a foreign branch exemption
- Some possible changes in the areas of groups, such as expanding the definition of “group” for group loss relief purposes, applying pragmatic administration procedures around groups making/allocating tax payments to individual group companies and the rationalisation of group structures in the context of aircraft leasing
- The ability to pool foreign tax credits relating to leasing income received which has been treated as royalty income and been subject to withholding tax.
We await with interest for details on the changes proposed in the forthcoming Finance Bill, due to be published in February.
While many general Budget measures will impact the Financial services sector (for example, the abolition of the 50% relief for employers PRSI on employee pension contributions), there are two main areas of particular direct relevance – the increase in savings retention tax and the increase in the VAT rate.
While the increase in the VAT rate from 21% to 23% will have an obvious effect on consumer spending, there is a huge knock on effect for the financial services sector where VAT represents a real cost for companies that do not have full VAT recovery in respect of costs.
There are other measures in the Budget that will be welcomed by financial services companies, including the foreign earnings deduction, the startup exemption and changes to the research and development credit regime. Further details in relation to these changes are set out below.
Corporation tax rate
In light of ongoing pressure from Europe in relation to our corporation tax rate, we welcome the Minister’s reaffirmation of Ireland’s commitment to the 12.5% corporation tax rate and his statement that there will be no change to our corporation tax rate.
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.
Research and Development Credit
The R&D tax credit has been 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.
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 cost 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. 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.
Start-up exemption extended
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, 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.
Indirect taxes
Increase in VAT rate from 21% to 23%
This change is effective from 1 January 2012 and is of particular relevance to the financial services industry as many companies operating in the banking, insurance and asset management sectors are not entitled to full VAT recovery on costs. This is an unwelcome change for the industry when costs are under substantial pressure and are constantly under review. This change will increase the irrecoverable VAT on every €100,000 of gross costs to a financial services company with no VAT recovery from €17,355 to €18,699.
Employee taxation
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 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.
PRSI on Employer Pension Contributions
The Minister today announced the removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions.
Universal Social Charge
The entry level for the Universal Social Charge will be increased from €4,004 to €10,036 in 2012.
Stamp duty
In a surprise move, Minister Noonan has reduced the stamp duty rate applicable to commercial property to a flat 2% rate on the transfer of freehold and leasehold commercial property, including farm land and industrial buildings. The reduction will be effective from 7 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 7 December and should be viewed in conjunction with the proposals to amend the provisions for retirement relief from capital gains which may also apply to the transfer of business assets.
Capital taxes
As expected, from 7 December 2011 the rate of capital gains tax will rise by 5% from 25% to 30%.
A capital gains tax holiday for capital gains arising on the disposal of property acquired between 7 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 this incentive.
