Finance (No.2) Bill 2011

Introduction
The Finance (No.2) Bill 2011 was published on 19 May, 2011 which provides for the tax changes outlined in the Jobs Initiative announcement in the previous week. The provisions relating to the Pensions Levy have been eagerly awaited. Unfortunately we will have to wait until a new Pensions Bill and possibly a Social Welfare Bill is published before we get a full picture of all the changes that will affect pension funds. No date has yet been announced as to when the new Pensions Bill will be published.

Changes to PRSI on share based remuneration and on low incomes together with any changes required for pensions will appear in a Social Welfare Bill to be published in early June.

Details of the all tax provisions in the Bill including the Pensions Levy are set out below.

Pension fund levy

• Implementation details confirmed
• Further clouds on the horizon
• Potential win on VAT savings

The Finance (No. 2) Bill 2011 gives effect to the pensions fund levy announced by the Minister for Finance as part of the Jobs Initiative. It will be in the form of a levy of 0.6% applied to the market value of assets under management in any (pre retirement) private pension vehicle.

Specifically, what plans will the levy apply to?
The levy will be payable by most private pension arrangements approved by the Revenue. These include:

• Occupational defined benefit and defined contribution schemes (including Additional Voluntary contribution (AVCs) arrangements)
• Personal Retirement Savings Accounts (PRSAs)
• Personal Retirement Bonds (PRBs) and
• Retirement annuity contracts

New IORPs (pension funds established in other EU countries that may include Irish employees) will be required to comply with the levy in order to obtain approval from the Revenue Commissioners. This will remove the potential to avoid the levy through establishing an ongoing pension scheme elsewhere.
The levy will not apply to:

• Approved Retirement Funds (ARFs)
• Pension annuities secured, in the name of the individual, with an insurance company
• Pension assets in respect of an employee whose employment in relation to the scheme is and/or always has been outside the state and
• Pension funds where the trustees have already taken the decision to wind-up the scheme prior and the employer is insolvent

How will the levy work?
The levy is payable by the scheme’s trustees or administrators – which for insurance contracts will be the insurance company.

The payment will be due in two tranches of 0.3% for each year. The first tranches are due on 25 July 2011, and the 25 March of each subsequent year. The second tranches are due on 25 October 2011 and the 25 September of each subsequent year. Interest and penalties apply if payments are not made by the due dates.

What will its effect be?
The Finance Bill overrides the provisions of the Pensions Act in permitting the trustees, administrator or insurer to pass the levy cost to members through an adjustment to benefits/funds. However, it leaves the decision to do so or otherwise in their hands.

For those with defined contribution benefits, the levy will result in lower fund values and a corresponding reduction in anticipated benefits.

Conversely, it may mean higher bills for Employers who sponsor defined benefit schemes, unless they can reach agreement with the trustees to reduce member benefits, including pensions in payment from the scheme.

The levy may have a much greater indirect impact in terms of individuals’ willingness to continue to save for the retirement in the current environment. It may also encourage further flight of pensions and other savings out of Irish institutions.


Mitigating the impact – the options

Deloitte has helped many employers restructure their defined benefit pension liabilities to ensure remove many of these conflicts and achieve a more sustainable pension provision framework for their employees.

Are there more changes in the pipeline?
Yes. The EU/IMF Four Year Plan anticipates that there will be a further reduction in pension related tax relief equivalent to €680 million per annum by 2015. This may be achieved through a significant reduction in tax relief on contributions, reduced caps on overall pension funds and perhaps an increased levy.

In addition, a recent government consultation paper has proposed a more onerous funding test for defined benefit (DB) schemes and a new model for future DB provision. The proposals are likely to lead to a substantial increase in cash costs for employers with DB schemes, as well as increased volatility in costs. These changes will be of greater financial significance than the levy. For many employers, they will also lead to conflict with the trustees and accelerate the “once and for all” decisions that are necessary to restructure DB schemes.

Is there any good news?
With all the negative news above, there are positive developments that we can anticipate in relation to VAT & Pension Fund Management charges.

While there always has been potential for trustees to recapture VAT in respect of certain overseas investment transactions, there are now signs that the EU Member States will agree to a change in EU VAT law to extend the existing management exemption for investment funds to occupational pension funds from January 2013. Pending an ECJ judgment expected in late 2012, there is also the possibility that VAT benefits could back-dated by up to four years, but only if trustees act now to put in a pre-emptive claim.

If you would like to discuss how your pension fund, whether defined benefit or defined contribution, should now plan to address the challenges of the levy and other changes that are in the pipeline, or to minimise its VAT costs and maximise recoveries, please contact any member of your Deloitte team.

Research & development tax credit
As indicated by the Minister for Finance in the Jobs Initiative, the Finance (No. 2) Bill 2011 introduces changes to the R&D tax credit regime which provides flexibility in the accounting treatment and will be helpful to existing Irish subsidiaries of multinational companies in competing for internationally mobile R&D projects and to Ireland in competing for new projects and jobs. The amendment in the legislation may also have the effect of increasing the amount of the credit which can be refunded in cash for certain loss making companies.

This enhancement, which seeks to increase Ireland’s competitiveness and enhance the benefit of the credit to the taxpayer, is a very welcome development and follows extensive dialogue by Deloitte with interested parties. The amendments apply to accounting periods commencing on or after the passing of the Bill.

The detail is as follows:

The definition of “payroll liabilities” now includes all amounts required to be remitted to the Collector-General in respect of the Income Levy, Parking Levy and Universal Social Charge.

A further change enhances the accounting treatment flexibility. The change relates to the amount of the credit which can be repaid in cash. Previously this was calculated as the greater of:

• The corporation tax payable by the company for the 10 years prior to the accounting period preceding the period in which the expenditure was incurred, or
• The amount of PAYE, PRSI and levies, which the company is required to remit in the period in which the R&D expenditure was incurred

This has now been amended to be the greater of:

• The corporation tax payable by the company for the 10 years prior to the accounting period preceding the period in which the expenditure was incurred, or
• The amount of payroll liabilities, which the company is required to remit in the period in which the R&D expenditure was incurred and, subject to certain restrictions, the immediately preceding period equal in length

The restriction applies where a company has made cash refund claims in previous years and is computed as the lower of:

1. The excess of cash refund amounts claimed in all prior accounting periods over the amount of payroll liabilities for these periods and,
2. The amount of payroll liabilities in the immediately preceding period equal in length.

In summary, the principal affect of the amendment is that an increased amount of the credit can be included above the line in the profit and loss account for US GAAP accounting subject to a company’s own accounting policy. This decreases the operating cost for the Irish operations and increases the profit before tax, thereby facilitating better overall global comparison of our cost base and enhancing competitiveness.


Reduced rate of VAT
The bill contains only one VAT change being the introduction of a 9% rate of VAT to certain services which are currently liable to VAT at the 13.5% rate. The services affected are in the main tourism related services or labour intensive service and are part of a jobs initiative by the government. EU VAT law provides that only certain services can qualify for the lower rate of VAT and accordingly, the scope of the Government to apply this rate is somewhat restricted. The Government in the Jobs Initiative focused primarily on trying to assist the tourist industry but in view of this restriction in EU law it has been unable to extend the new rate to all services used by tourists. It will be noted that the new rate will not apply to short term car hire which will remain subject to VAT at 13.5% or alcohol and soft drinks sold as part of a meal which will be vatable at 21%.

The 9 % rate will apply from 1 July 2011 to 31 December 2013 and the specified services covered by the new rate are as follows:

• restaurant and catering services, including vending machines and take-away food (excluding alcohol and soft drinks sold as part of the meal)
• hotel lettings, including guesthouses, caravan parks, camping sites etc
• cinemas, theatres, certain musical performances, museums, art gallery exhibitions
• fairgrounds or amusement park services
• facilities for taking part in sporting activities including green fees charged for golf and subscriptions charged by non-member-owned golf clubs
• certain printed matter including newspapers, brochures, leaflets, programmes, maps, catalogues, printed music (excluding books)
• hairdressing services

These changes, combined with the easing of Visa restrictions to apply to travellers from the UK in the summer of 2012 and the abolition of the air travel tax, are a welcome boost to the travel sector. It will be important that businesses adjust their accounting systems so that they can get the full benefit of the lower rate where it applies.


Air travel tax
The introduction of the travel tax has been cited as the reason for reduced traffic particularly through the regional airports and as being responsible for the cancellation of services on certain routes. The Finance Bill gives power to Minister for Finance to waive this duty at some date in future. Discussions are to be held between the relevant airlines and The Minister for Transport, Tourism and Sport. It will be interesting to see the response from the airline industry and whether this ultimately reverses the decline in passenger numbers though our airports.


PRSI – Proposed changes announced in the Jobs Initiative
Employee’s and employer’s PRSI was introduced on share based remuneration with effect from 1 January 2011.

The rules were somewhat relaxed in March 2011 when the Revenue Commissioners announced that PRSI would not apply where written agreements providing for share entitlements had been in place prior to 1 January 2011.

As part of the Jobs initiative, the Minister announced that employer’s PRSI will not be charged on share based remuneration from 1 January 2011 but he did not confirm whether employee’s PRSI will also be abolished. It is therefore uncertain whether employee’s PRSI will still be applicable on share arrangements made post 1 January 2011.

The Initiative also outlines the proposal to halve the lower PRSI rate of 8.5% until 2013 for employee’s earning up to €356 per week (equivalent to €18,512 per annum). This will apply to those currently in employment and to new employees from 1 July 2011. This will reduce the employer cost by up to €787 per employee but will not result in any savings for the employee.

The Social Welfare Bill 2011 to effect these changes and to confirm the position is due to issue in early June.