Insight from Daryl Hanberry, tax director, Deloitte on 
Budget 2013

Multinationals

From a foreign direct investment point of view, it was imperative that Budget 2013 reflected the importance of multinationals to the Irish economy. This week the Central Statistics Office announced that foreign-owned multinational companies accounted for almost a quarter of Gross Value Added created in the economy in 2011. It was hoped that Budget 2013 would provide additional impetus, or at the very least, not introduce measures which would negatively affect the sector. Given the constraints arising from the requirement for a €3.5 billion fiscal adjustment, the Minister can broadly claim to have achieved this objective.

Corporate Tax Regime

The Minister defined Ireland’s corporate tax strategy as the 3 R’s – Rate, Regime and Reputation. It is to be welcomed that the Government recognizes the importance of retaining Ireland’s competitiveness for foreign direct investment. In particular, it is very positive that the Minister reaffirmed Ireland’s commitment to maintaining the 12.5% headline rate of corporate tax.

Given the international focus on low tax regimes, it was also useful for the Minister to remind potential investors that Ireland offers a transparent corporation tax regime accompanied by a rapidly growing network of international tax treaties with a full exchange of tax information. This was emphasized by the fact that Ireland recently became one of the first countries in the world to conclude a new Intergovernmental Agreement with the US aimed at implementing the new US Foreign Account Tax Compliance Act (FATCA).

Research & Development

Over the last number of years, there have been significant improvements to Ireland’s R&D tax credit and intellectual property regimes. Budget 2013 placed an emphasis on assisting small and medium sized indigenous industries by increasing the amount of expenditure that is eligible for the R&D tax credit on a volume basis from €100,000 to €200,000. This should assist in growing innovative companies in Ireland and this expertise and experience can be used to support multinationals in their own R&D activities. The Minister also stated that a full review of our R&D Tax Credit would be carried out to ensure it remained “best in class” internationally. This is a welcome development and we look forward to contributing to any consultation process as part of this review.

Real Estate Sector

Another positive announcement was in relation to the introduction of Real Estate Investment Trusts (REITs). REITs have been available in many foreign jurisdictions such as the US and UK for a number of years and the introduction of this type of property investment vehicle to Ireland is to be welcomed. While we await the specific details as to how the REIT will operate, we understand the REIT will be a tax exempt entity and the investors will only be taxed when the income is distributed. This would be in line with how REITs operate in other jurisdictions. The aim of a REIT is to provide investors with an investment vehicle that allows risk diversification while also leaving them in a similar after-tax position as if they had invested in the property directly. This measure should assist in attracting foreign real estate investors to Ireland.
Budget 2013 also announced measures would be introduced to facilitate the construction of aircraft hangars and ancillary facilities attracting additional aviation sector organizations to Ireland. We await further details of these measures.

FDI Competitive Landscape

Foreign direct investment operates in a competitive landscape and many other jurisdictions, including our nearest neighbor the United Kingdom, have refined their corporate and income tax regime in recent years to attract additional investment.

In particular, the UK have recognized the importance of marginal income tax rates on individuals when it comes to attracting foreign corporations and they have recently lowered their marginal rate from 52% to 47%. In this context, it is imperative that we remain competitive and the fact that our marginal rate of 52% remained untouched after Budget 2013 is to be welcomed.

British Chancellor George Osborne presented the UK autumn statement and announced a further lowering in their corporate tax rate to 21% from April 2014. In the face of further competition from the UK and other jurisdictions, we need to be constantly reviewing our overall tax regime to ensure we do not rest on our laurels.

Some minor changes introduced in Budget 2013 include the enhancement of the recently introduced Foreign Earnings Deduction regime. The FED will be extended beyond Brazil, Russia, India, China and South Africa (BRICS) to include some additional African countries.

In addition, there are comments around extending the Film Tax Relief Scheme from 2016 so as to make Ireland even more attractive for foreign film and TV productions. We await further details on this issue.
It would be hoped that the Finance Bill would also introduce some additional minor technical amendments aimed at enhancing the tax environment for multinationals and addressing their concerns.

Conclusion

The Government had a difficult task in introducing Budget 2013 having steadied the economic ship over the past couple of years. Overall it appears the FDI policy of Budget 2013 is ‘steady as she goes’ and given the necessary cuts in other areas, this approach is to be welcomed.