Finance Act 2010: Corporation tax
The Finance Bill is one of the more substantial Finance Bills issued in recent years. A significant number of positive changes have been introduced indicating the Government is trying to respond proactively to the current economic climate. In particular the Government has introduced provisions that should enhance Ireland’s attractiveness for inward investment and as a location for corporate headquarters. There are also a number of welcome provisions that should reduce the administrative burden on companies. However, the Finance Bill also includes a number of new anti-avoidance provisions which will require careful consideration and which could have “far reaching” implications.
Unilateral credit relief for royalties
Foreign tax credit relief has been extended to royalty income from non-treaty countries generated by companies as part of trading income. This is a very welcome amendment and is something that has been lobbied for to improve the attractiveness of Ireland as a location for inward investment and in particular as a location to hold intellectual property.
Withholding tax on royalties
Currently a withholding tax rate of 20% can apply in certain circumstances to royalty payments. The Finance Bill introduces a provision which would enable royalties to be paid by a company carrying on a trade or business in Ireland to a company which is resident in an EU or Treaty country free of withholding tax. The relevant EU or Treaty country must impose a tax which generally applies to royalties receivable in that country. The payment must also be made for bona fide commercial reasons and must not be part of a scheme or arrangement to avoid tax. In addition such foreign companies will not be liable to Irish income/corporation tax in respect of such income.
Intangible assets
The provisions in relation to tax relief for expenditure on intangible assets that were introduced by Finance Act 2009 have been amended. The principal amendments are as follows:
- The period for which specified intangible assets must be used in a trade in order to avoid a clawback of allowances has been reduced from 15 to 10 years
- The existing scheme of capital allowances for expenditure on computer software has been amended so that it applies to “end use” type software onl
- The definition of specified intangible assets has been extended to include computer software or a right to use such software (and specifically excludes software which qualifies for capital allowances outside the intangible assets regime)
- The list of specified intangible assets has been extended to include applications for the grant or registration of patents, copyright etc and a broader definition of know-how
- An amendment to legislation is proposed to ensure that where an intangible asset is revalued downwards in the company’s accounts due to impairment of the asset, relief will be available for the impairment charge
On balance the proposed changes include a number of favourable amendments to extend the existing regime that provides for capital allowances for expenditure on intangible assets.
Research and development
One of the key areas for growth that has been identified by the Government is in the context of the “knowledge economy” and in this regard, successive Finance Acts have been improving the scheme for tax credits on qualifying expenditure for research and development credits (R&D). A favourable R&D tax credit regime is key to attracting future high value industries to Ireland.
The Finance Bill has made a number of amendments to the existing regime. The 2003 base year for the purposes of calculating incremental expenditure has been retained. However revisions have been made to the legislation in the context of expenditure by a group which undertakes R&D in a number of research and development centres. The proposed legislation provides that where one of these centres ceases to be used, the expenditure on R&D in respect of that centre is excluded from the threshold amount when calculating the groups incremental expenditure on R&D. There are provisions for clawbacks of the amount by which the qualifying group expenditure on R&D has been increased as a result of a reduction in the threshold amount, where the research centre which has ceased is used by the group for trading purposes or alternatively where the R&D which was carried on in that research and development centre is carried on in another research and development centre. A clawback can also apply where within a period of 10 years from the date the research and development centre ceased to be used no company which is a member of the group is carrying on a trade within the charge to corporation tax.
Foreign dividends
On a welcome note, the Bill proposes to extend the 12.5% rate to foreign dividends paid out of underlying trading profits of a company resident in non-treaty country to a company liable to Irish Corporation Tax where (i) the shares of the company or (ii) at least 75% of the company is owned by a publicly quoted company in Ireland or other treaty state. In addition foreign dividends received by portfolio investing companies (companies with a holding and voting rights of less than 5%) are now exempt from corporation tax where they form part of the trading income of the recipient.
The provisions also include some amendments that are intended to simplify the rules for identifying the underlying profits out of which the dividends are paid for the purposes of determining the appropriate rate of tax in respect of those dividends. These provisions apply with respect to dividends paid on or after 1 January 2010. This amendment should further enhance Ireland’s attractiveness as a location for inward investment and in particular in attracting multinational seeking to migrate headquarters.
Dividend withholding tax
The Finance Bill proposes a very welcome amendment to the dividend withholding tax (DWT) provisions. Previously in order for qualifying non-resident companies to receive dividends gross they had to provide a certificate of tax residence or an auditors’ certification to the paying company. This created an administrative complexity and an undue burden for both the paying company and the non-resident recipient company. The Finance Bill has removed the requirements to obtain such certificates and instead dividends can be paid without deduction of DWT at source where the recipient company provides a declaration with the requisite information to the company paying the dividend on a self assessment basis. The declaration is valid for a maximum period of six years after which a new declaration must be provided.
Foreign tax/carry forward of losses on branch profits
The Finance Bill permits unused credits in respect of foreign tax on branch profits to be carried forward and credited against corporation tax in future accounting periods and in addition permits companies to carry forward losses of a foreign branch that were previously exempt from tax. Ireland continues to be seen as an attractive location for multinationals to locate their headquarters. In many cases multinationals have sought to locate their headquarters in Ireland with branches of the company in other foreign jurisdictions. The ability to carry forward foreign tax on branch profits should make it easier to ensure that no Irish tax arises on foreign branch profits and is something that had been strongly lobbied for by a number of industry groups, in particular the insurance industry.
Anti-avoidance in respect of dividends paid out of foreign profits
The Bill includes anti-avoidance provisions which could have a significant impact for foreign companies intending to migrate tax residence to Ireland. Under existing legislation a foreign company could migrate tax residence to Ireland and pay a dividend to its Irish parent company, such dividend would be regarded as Franked Investment income and not subject to tax in the hands of an Irish resident parent company. Broadly the proposed amendments would have the effect of treating dividends paid out of profits generated prior to the company becoming tax resident in Ireland as being subject to tax (but with the potential for foreign tax credit relief) if the recipient company is connected with the paying company. Broadly the provisions apply if the paying company became resident in Ireland on the date Finance Act 2010 is passed or later. An important Committee Stage amendment is that the legislation will not apply where the paying company was at all times before it became resident not controlled by Irish residents.
Purchase of own shares by a quoted company
Under Irish legislation a payment by a quoted company on the redemption of its own shares was not treated as a distribution i.e. capital gains tax treatment applied for shareholders. This section introduces an anti-avoidance provision which has the effect of treating such payments by a quoted company as a distribution in certain circumstances. In order for the payment not to be treated as a distribution it is now a requirement that the payment is not part of a scheme or arrangement the purpose of which is to allow the owner of the shares participate in the profits of the company or its 51 % subsidiaries without receiving a dividend. If the payment is part of such scheme or arrangement, the payment will be regarded as a distribution (liable to income tax for individual shareholders at their marginal rates) and the company will be required to apply dividend withholding tax (DWT) provisions. This section is effective in respect of payments made on or after 4 February 2010.
Approved charities and donations
In order to bring Irish legislation in line with certain provisions of EU Treaties, the Bill introduces a number of provisions relating to charities. The Bill provides that charities established in any state which is a member of the European Economic Area or the European Free Trade Association will be entitled to apply for a tax exemption in respect of any qualifying income arising in the State. The exemption is currently only available to Irish charities. The Bill also provides that where such a charity is granted charitable status, it may apply for the donations relief scheme after a period of two years so that tax relief would be available for donations made, provided certain conditions are satisfied.
The Bill also includes provisions to assist Revenue in administering the extension of the schemes.
Tax treatment of Government securities
The Bill provides that the tax exemption which currently applies to income arising on Government Savings Certificates will apply to interest in respect of similar products issued by governments of other EU Member States.
The Bill also provides that the tax exemption for certain Government securities is extended to apply to non-resident individuals. Currently, there is a requirement for the person to be non-ordinarily resident and/or non-domiciled.
Interest paid to a company resident in a “relevant territory”
Presently, there is an exemption from Irish income tax and withholding tax on interest payments by an Irish company or investment undertaking to a company resident in a “relevant territory”. A relevant territory is an EU Member State (excluding Ireland) or a country with which Ireland has a double taxation agreement (or has made such an agreement and it has yet to be ratified).
The Bill as amended by the Committee Stage provides that relief will only apply where the recipient of the interest is resident in an EU country or a country with which Ireland has a DTA which imposes a tax that “generally applies” to interest receivable from sources outside that territory or where the interest is exempt from income tax under the terms of the relevant DTA. This is likely to create practical difficulties as it will now be necessary to confirm that tax generally applies to interest paid to a relevant territory before the exemption will apply. Where this cannot be proven, the domestic exemption will not apply and the rate of withholding tax for interest payments contained in the relevant double tax treaty will apply to any interest payments made after the passing of the Act.
The proposed legislation does include a “grandfathering” for existing agreements whereby the provisions will only apply to agreements entered into after Finance Act 2010 has been enacted.
Capital allowances on energy-efficient equipment
Finance Act 2008 introduced a scheme which provides for 100% capital allowances in the year of purchase on expenditure incurred by a company on qualifying energy-efficient equipment bought for the purposes of the trade. Further to the announcements in the Budget, the Bill provides for an extension of the categories of energy-efficient equipment qualifying for 100% capital allowances to include: refrigeration and cooling systems, electro-mechanical systems, and catering and hospitality equipment.
Technical adjustments have also been made to the descriptions of two existing categories (Motors & Drives and Information & Communications Technology). The new provisions will come into effect upon a Ministerial commencement order.
Cross border transfer of trades
Where a company disposes of assets on which capital allowances have been claimed, or where the company ceases to use those assets for the purposes of its trade, a clawback of allowances previously claimed (i.e. a balancing charge) may be triggered. The Bill brings the Irish tax treatment of such a disposal into line with the EU Mergers Directive where the assets are disposed of on the transfer of a trade from one company to another in the course of a merger and where the transferring company receives no consideration for the transfer of the trade apart from the assumption of its liabilities by the transferee company.
In that case, the company taking over the assets as part of the merger will be treated as always having owned the assets and will continue to write the assets down over their remaining tax life. A balancing charge will not be triggered for the transferring company.
Tax clearance certificates
The Bill seeks to expand the taxes with which a taxpayer must be compliant before a tax clearance certificate will be issued to include custom duties and excise duties.
Co-operation to combat tax evasion
The Bill includes provisions which will allow the Government to enter into double-taxation agreements with other countries which facilitate the recovery of Irish taxation in the foreign treaty jurisdiction and vice versa. Provisions are also included to facilitate the Convention on Mutual Administrative Assistance in Tax Matters being incorporated into Irish law. This convention provides for co-operation between signing countries in relation to recovering foreign tax and exchanging information in order to combat tax avoidance and evasion.
New tax treaties
The Bill ratifies new double-taxation agreements with Bahrain, Belarus, Bosnia and Herzegovina, Georgia, Moldova and Serbia.
It also provides for the ratification of information exchange agreements with eight other countries/territories, which are Anguilla, Bermuda, the Cayman Islands, Gibraltar, Guernsey, Jersey, Liechtenstein, and the Turks and Caicos Islands.
Relief for childcare facilities
The Bill proposes the abolition of the scheme of capital allowances in respect of childcare facilities/crèches on 30 September 2010. The Bill provides for transitional measures for projects already in the pipe-line. Therefore, where certain conditions are satisfied, relief may continue to be available for expenditure incurred by 31 March 2012.
Miscellaneous provisions
There are a number of other provisions that will impact corporates. Principally these should have the effect of facilitating companies and reducing compliance burdens on companies. In particular the exemption from Corporation Tax and Capital Gains Tax for start up companies introduced by Finance Act 2009 has been extended by Finance Bill 2010 to include companies which commence to trade in 2010. Whilst this is to be welcomed it is questionable what the practical benefit of this provision will be as many start-up companies are loss making during such a start up period.
In relation to relevant contracts tax (RCT) the compliance obligation on contractors has been reduced. In this regard the Finance Bill reduces the frequency with which principal contractors are required to file RCT returns and make associated payments and also allows for a longer validity period for the Form C2. The section provides that a C2 can be issued to cover two tax years whereas previously the C2 could only be issued for a period of one year. The provisions should reduce the administrative burden on taxpayers.
The National Asset Management Agency (NAMA) Act introduced a tax of 80% on profits or gains arising on certain land disposals The Finance Bill introduces a number of amendments including the exclusion of profits on the disposal of small sites (a site that does not exceed 0.4047 hectares or 1 acre in size and has a market value of less than €250,000) and extends the provisions to situations where windfall profits arise where planning authorities grant planning permission in contravention to the development plan for the area.
Mandatory disclosure of certain transactions
In what is described as an anti-avoidance measure the Minister for Finance introduced a very late amendment to the Finance Bill 2010 at committee stage providing for the mandatory reporting of certain transactions.
Broadly speaking the proposed amendment provides that either promoters (which will include accountants, tax advisors and banks) or tax payers contemplating or implementing certain transactions will be obliged to provide details of those transactions to Revenue. The transactions are described as disclosable transactions and are broadly defined as any transaction or any proposal for a transaction which might result in the obtaining of a tax advantage for any person.
Apart from broad policy concerns mentioned below in relation to the proposed legislation an unsatisfactory feature of the amendment as presented is that it is vague on precisely what type of transactions will require to be reported to Revenue and when they must be reported. This detail is to be contained in regulations made by the Revenue Commissioners with the consent of the Minister for Finance. Among the matters to be contained in the regulations are:
- The type of transactions which are to be “disclosable transactions”
- The type of information to be provided to the Revenue Commissioners in relation to disclosable transactions
- The time period within which information must be provided to the Revenue Commissioners
Therefore, while clearly signalling that there will be compulsory reporting of certain transactions, the draft legislation does not set out precisely what those transactions will be, how they are to be reported to Revenue or when. Given that the provisions if enacted will apply to transactions falling after the date of the passing of the Act, which is likely to be before the publication of the detailed regulations, there will be a period of uncertainty during which persons contemplating transactions will not know whether those transactions will be included as “disclosable transactions” when the detailed regulations are published. This is most unsatisfactory.
The Minister has stated that his officials and officials of the Revenue Commissioners will engage in a consultative process with practitioners and other interested parties in the drawing up of the detailed regulations. In these difficult economic times the regulations when drafted must ensure:
- Certainty for tax payers engaging in normal commercial transactions
- The regulations are clear on what transactions are reportable, what information is to be provided and when
- Compliance with regulations must not lead to burdensome tax administration impositions and compliance costs
The manner in which this very significant amendment was introduced by the Minister without consultation is to be regretted. The vagueness of the legislation creates uncertainty at a time when business needs it least. Hopefully the consultative process which the Minister has promised leading to the detailed regulations will remove any uncertainties.