In his Budget speech, the Minister commented on the need to take stock at how Ireland is emerging from the worst of the crisis and how the efforts of the Irish people are leading to success. He acknowledged that the real measure of success is a growing and developing economy.
In looking at how the economy can grow and develop in the context of the Financial Services (FS) sector, there were some elements outlined in the Budget which, while not directly aimed at the FS, may have an indirect impact in the sector. The reality is that the Finance Bill which will issue in February is more likely to contain any FS focused tax changes. One of Ireland’s traditional strengths has been to make sure that we stay ahead of the curve in terms of enhancing the tax framework, supporting innovation and attracting and retaining key skills in Ireland which will help further develop Ireland as a top class FS centre. We are all acutely aware of the competition that other key Financial Centres such as London, New York, Singapore and Germany pose. While we should never underestimate how important the retention (and reaffirmation once again in today’s Budget speech) of the 12.5% tax rate is to Ireland and particularly to the FS sector, it is also vitally important that we continue to innovate, introduce new financial products and incentivise businesses not only to locate here, but to retain what they have here.
Changes announced today in the context of extending the Foreign Earnings Deduction (FED) to certain African countries, and to potential enhancements to the carried interest provisions, sound like good news. Increases in the rates of retention tax on returns from deposits, investment funds and life products were not unexpected as it is something we have been accustomed to in each Budget.
While the pension changes were flagged in the press over the last few days, it was encouraging to hear the Minister highlight the pension sector as a very important part of the FS industry in Ireland. While there is an obvious impact on the sector in terms of the potential reduction in inflows as a result of the policy decision to restrict tax relief to schemes which provide pension income up to €60,000, it is welcome that the Minister will consult on how the specific changes will be implemented.
One comment made by the Minister referred to “the feasibility of new funding sources for airlines and aircraft financing and leasing companies”. We will need to wait for further details in the Finance Bill.
While the Minister made the announcement primarily with the property sector in mind, the introduction of Real Estate Investment Trusts (REITS) is to be welcomed for the funds industry as well as the wider FS sector. REITS are already well recognised around the globe and so their introduction in Ireland certainly complements and enhances the existing fund offerings, as well as the specialist financing products, that international investors are already familiar with.
Another notable announcement in the Budget speech was the fact that the Intergovernmental Agreement (IGA) between Ireland and the USA on the implementation of FATCA (Foreign Account Tax Compliance Act) has been concluded. Ireland is ahead of the curve in terms of being in the first wave of countries entering into an IGA. While the focus of the IGA is the exchange of information between the US and Ireland in relation to financial accounts/interests in Irish financial institutions by US persons and US financial accounts/interests by Irish residents, its main aim is to combat international tax evasion. The IGA will provide certainty to Irish financial institutions in their FATCA preparations and the hope is that it will go some way to reducing the administrative, compliance and cost burden that results from FATCA. More detailed legislation and guidance will issue as part of the Finance Bill.
Other changes we would like to see in the Finance Bill for the FS sector would include the introduction of a corporate fund vehicle for which US investors can “check the box” for US tax purposes, a branch exemption for insurance companies, pooling of tax credits for leasing companies, the removal of withholding tax for Treasury /Cash pooling entities (regardless of the location of the recipient) and a participation exemption that addresses the complications of the current calculation method by replacing it with a clear and unambiguous dividend exemption.
So many challenges exist in the current environment whereby the Government must weigh up how best to stimulate growth and the recovery of our economy, whilst also trying to minimise the cost and impact on tax payers. New product innovation (such as REITs) and attracting and retaining the right skills must be the way forward. Ireland needs to be able to market and sell its good news stories throughout the world, and positive, pro-business changes to our tax regime is one way of doing just that.