Finance Act 2010: Multinationals
The Bill includes significant positive changes to the tax landscape focusing on Ireland as a knowledge economy and an international head-quarters location. The key positive measures announced include:
- The remittance basis of taxation has been amended so that it will be easier to attract non-Irish intellectual capital, with a view to ensuring Ireland is operating at a world class level
- The expansion of the IP regime to definitively include software and applications for the grant or registration of patents, copyright etc and the inclusion of a broader definition of know-how, is in line with modern standards
- The expansion of the tax credit regime and the simplification of the procedures to pay dividends and royalties without withholding tax will facilitate more multinational companies locating headquarter operations in Ireland
Transfer-pricing was also introduced as was expected. Given the focus on tax regulation globally the introduction of a formal transfer-pricing regime was expected and indeed should be broadly neutral as regards Ireland’s attractiveness as a location for investment.
Transfer pricing
The objective of the transfer pricing law is to ensure that an arm’s length price is charged in arrangements (arrangement is widely defined in as any agreement or arrangement of any kind whether or not it is, or is intended to be, legally enforceable) involving the supply or acquisition of goods, services, money or intangible assets between connected persons where the profits or losses of either company are chargeable to Irish tax as trading profits or losses. Corporates are connected where there is at least a 50% relationship but can be connected in other circumstances.
The transfer pricing regime will not apply to financing activities such as an isolated interest free loan. Financial services treasury companies will need to evaluate the impact of the law on their loan books and other financing transactions. The law will also not apply to isolated intellectual property (IP) transactions such as a royalty free structure but again where the company is carrying on a trade of managing IP, a full review of transactions should be undertaken.
The law applies to both domestic and cross-border trading transactions between companies and also applies to Irish branches of foreign companies that are within the charge to Irish tax on their trading activities. Transactions between head offices and branches do not fall within the terms of this law.
There is a full exemption for small and medium sized entities. A small/medium sized entity is one with a staff head count of less than 250 and an annual turnover of €50 million or less, or a annual balance sheet total of €43 million in assets or less, which figures are assessed annually on a group wide basis.
Companies are required to have available records that would reasonably be required for the purpose of determining whether the trading income of a company is computed by virtue of the arm’s length principle. It should be possible to rely on counterparty documentation to meet the Irish documentation requirement.
The law is to be interpreted in accordance with OECD guidelines on transfer pricing and specifically mentioned are the report on intangible property and the report on cost contribution arrangements. As would be expected, the double tax treaty provisions take precedence over this law.
The legislation contains provisions for grandfathering of arrangements made before 1 July 2010.
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 only
- 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.
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 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.
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.
Remittance basis
Remittance basis removal for Irish Citizens – not ordinarily resident in the State
The remittance basis for income tax for non Irish income is being removed with effect from 1 January 2010. For the last number of years the remittance basis had been restricted specifically in respect of foreign employment income where the duties were performed in the State. It was however still available to:
- Non Irish domiciles OR
- Irish Citizens who were not ordinarily resident in the State
in respect of their:
- Foreign employment income relating to non-Irish duties AND
- Other foreign (non employment) income
As from 1 January 2010 this beneficial tax regime has been removed for Irish citizens irrespective of their ordinary residence status in the State. Although a full removal of the remittance basis was recommended in the Commission of Tax report, this amendment remains disappointing in that it removes one of the few attractive points for any Irish entrepreneur seeking to return home. The relief itself was typically only available for a period of 3 years following an individual’s return to Ireland, until ordinary residence was regained, and, as such, it is unfortunate that such a short term benefit has been removed.
Extension of the remittance basis to EU countries
Some welcome news for non-Irish domiciles with foreign employments, and ultimately good news for Ireland in general, is the extension of the tax repayment available for unremitted employment income designed to compensate for the removal of the original remittance basis.
Introduced in Finance Act (No.2) 2008, this repayment claim was available only in very limited circumstances where Ireland had a Double Taxation Agreement with a country outside the EU. Additional restrictions also applied to the employee such that a repayment claim was not always available.
The amendment, which applies to non Irish domiciled individuals who become resident in and working Ireland for first time during 2010 or thereafter, makes a repayment claim more widely available. Specifically, the amendment provides that being an EU national or having an EU employer, no longer excludes an employee from making a repayment claim.
Additionally, a claim can be made in respect of 2010 and future years where an employee has only been working in Ireland for one year, whereas for 2009 an employee has to work in Ireland for 3 years.
Where all conditions are satisfied, an employee may make a claim on their tax return for the appropriate year for their taxable income to be determined based on the higher of:
- The actual amount attributable to Irish duties that was remitted in that year OR
- €100,000 plus 50% of the balance attributable to Irish duties.
While the repayment claim is not available to Irish domiciles even if they have a foreign employment, this measure is likely to increase Ireland’s attractiveness to foreign multinational companies considering investing into Ireland.
Domicile levy
The “Domicile Levy” is introduced as indicated in the Ministers budget speech. The domicile levy is designed to ensure that certain individuals who continue to have close ties to the State will pay a minimum amount to the Department of Finance irrespective of their residence position here. The domicile levy itself is a maximum annual amount per tax year of €200,000 which can be reduced to the extent that income taxes which are due for that tax year and have been paid by or on the due date of the domicile levy. The due date for the domicile levy is the 31 October following the end of the tax year in question. As such the first domicile levy due will be payable on 31 October 2011 at which time a return must also be made to the Revenue Commissioners with all the particulars. Any income taxes due for 2010 and paid before 31 October 2011 will therefore reduce the level of domicile levy payable.
The domicile levy will be due in respect of:
- An individual who is domiciled in, and is a citizen of, the State AND
- Whose worldwide income for that tax year is more than €1,000,000 AND
- Whose liability to income tax in the State for that tax year is less than €200,000 AND
- The market value of whose Irish property on the valuation date in the tax year is in excess of €5,000,000
The valuation date is 31 December of the tax year in question. As currently drafted it appears that Revenue will be taking a strict line with the new levy, in that they must be satisfied with the valuation of the property on the return otherwise they can use their own estimate which would then have to be appealed by the tax payer if disputed. Revenue would appear to have been granted a great deal of latitude in this regard, while it is acknowledged that they may utilise qualified persons to determine the appropriate valuation and thankfully not at the taxpayers’ expense, at least not directly. Irish property relates to all property situate in the State at the 31 December in question but specifically excludes:
- Shares in a company which exists wholly or mainly for the purpose of carrying on a trade or trades AND
- Shares in a holding company which derive the greater part of their value from subsidiaries which wholly or mainly carry on a trade or trades
Worldwide income will also come under close scrutiny with the valuation to be made on the basis of an individual being resident in the State even if not otherwise resident here. Following the trend set by the income levy, certain deductions normally available for income tax are disregarded when considering worldwide income for the purpose of the domicile levy. The removal of the remittance basis for Irish citizens who are not ordinarily resident may also increase the level of worldwide income for the domicile levy.
The Committee Stages of the Bill have been used to at an early stage apply anti-avoidance provisions surrounding the disposal/transfer of Irish property to a spouse/minor child or through the use of a discretionary trust or other vehicle. The provisions only apply to disposals/transfers on or after 18 February 2010 for less than market value, and result in the property remaining under the beneficial ownership of the transferor for the purpose of the domicile levy.
The potential negative impact of the Domicile Levy on investment into Ireland is also acknowledged in the Committee Stage amendments. An individual may now request an opinion from Revenue, when considering making a significant investment in the state, whether such an investment would bring them within the Domicile Levy net. Revenue are not, however, obliged to give such an opinion.
Equity awards
Restricted shares
The Bill contains two technical amendments to the rules regarding the taxation of shares acquired by directors and employees which are subject to certain restrictions.
The first amendment provides that the trust in which the restricted shares are held, must be established in the State or in another EEA State and that the trustees must also be resident in the State or in another EEA State. Employers seeking to provide such restricted shares to directors/employees will need to ensure that the employee benefit trusts which are established to hold the shares during the restricted period fulfill these conditions. The amendment applies to restricted shares acquired on or after 4 February 2010.
The second amendment clarifies that it is the amount of income chargeable to tax on the acquisition of the restricted shares that is reduced and not the amount of income tax payable. This definition has been back dated to 20 November 2008, the day the restricted shares legislation was originally introduced. This is a welcome move as there had been a lack of clarity in the language of this section.
The amount of income chargeable to tax on the acquisition of the restricted shares can be reduced by up to 60%, depending on the length of the restricted period.
Share scheme reporting
The Minister has announced a new section which makes it mandatory for employers to automatically file returns of information to the Revenue Commissioners regarding shares and other securities awarded to directors and employees. The filing deadline is 31 March in the year of assessment following the year in which the award was made.
While the new section applies to all awards of shares to directors and employees, it is aimed at the reporting of “free” shares awarded to directors and employees which employers have not previously been automatically obliged to report to the Revenue Commissioners. The new section will not apply where employers have an obligation to report specific types of share awards (e.g. unapproved share options, restricted shares, forfeitable shares, convertible securities) to the Revenue Commissioners under other income tax provisions.
While this new reporting section applies on or from 1 January 2010, employers will need to file a return detailing the shares awarded to employees and directors in the 2009 tax year by 31 March 2010. This reporting requirement will add more strain to employers whose administrative burden regarding share scheme reporting has increased significantly in recent years.
It also remains to be seen how this new reporting obligation will interact with the Form P11D on which employers are required to report employee benefits (including free shares) when notified by Revenue to do so.
Broadly, as a result of this provision, employers are now required to report all equity awards to Revenue.
The Bill also provides for penalties where employers fail to make the required returns of information and where they fraudulently or negligently make incorrect returns.
Approved profit sharing schemes
The Bill provides for amendments to the legislation regarding Revenue approved profit sharing schemes which are designed to counteract tax avoidance schemes which have arisen in this area.
The first amendment provides that with effect from 4 February 2010, the Revenue Commissioners will not approve a profit sharing scheme unless they are satisfied that there are no arrangements in place that provide for loans to be made to employees eligible to participate in the scheme.
The second specifies that shares appropriated to employees on or after 4 February 2010 cannot be shares in certain service companies.
Start-up exemption
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.
Stamp duty - transfers of shares
Where shares in a company are transferred and the transferee procures either directly or indirectly for any debt of the company (or any related company) to be repaid, this debt will now be regarded as consideration for the transfer and stamp duty shall be payable accordingly. This change has been introduced to prevent a situation whereby debt is used to artificially reduce the value of the shares transferring and in turn the amount of stamp duty payable.
Carbon taxes
There are a number of new provisions detailing the carbon tax charges promised in the Budget. Carbon tax is levied at €15 per tonne of CO2 emitted and will apply to petrol and auto diesel, natural gas and solid fuels.
In real terms the new charge gives rise to an increase of 4 cent on a litre of petrol and 4.5 cent on a litre of auto diesel. There is relief from carbon tax for bio-fuel or where bio-fuel is mixed with other mineral oils and the bio-fuel makes up more than 10% of the mix.
The new Natural Gas Carbon Tax will apply to any supplies of natural gas made on or after 1 May 2010 and will be levied at a rate of €3.07 per mega-watt hour. The supplier will account for the tax to Revenue, based on bi-monthly taxable periods. The returns and accompanying tax will be due within 30 days of the end of the taxable period. Non established suppliers will have to establish a company in the State that will be liable to account for the tax.
The Solid Fuel Carbon Tax will apply to supplies of coal and peat. There are varying rates set out depending on the fuel, for example the charge will amount to €39.51 per tonne of coal and €27.50 per tonne of Peat Briquettes. The rates are set to correspond to a levy of €15 per tonne of carbon dioxide emitted by the fuel. The supplier will account for the tax to Revenue, based on bi-monthly taxable periods. The returns and accompanying tax will be due within 30 days of the end of the taxable period The tax will apply from a date specified by ministerial order.
Professional services withholding tax
The Bill has increased the scope of accountable persons who must now operate professional services withholding tax. The list of bodies now includes:
- Pobal
- Commission for Energy Regulation
- Digital Hub Development Agency
- National Transport Authority
- The Medical Council
- Anglo Irish Bank Corporation Limited
- Central Bank and Financial Services Authority of Ireland
- Financial Services Ombudsman’s Bureau
- Broadcasting Authority of Ireland
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.
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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.
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.
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.