In volume terms, financial services did well in the Finance Act with a total of 21 individual measures. Corporate treasury and leasing sectors benefit from measures to allow them to transact with a greater range of territories and still get the benefit of a tax deduction or double taxation relief. The insurance and funds sectors benefit from enhancements that allow greater flexibility in group structures and the use of losses and mergers and reorganisations. Securitisation and Islamic finance also feature among the changes in the Act.
The overall sense of the accumulation of measures in the Act is that they will support and enhance the ability of existing financial services companies to retain and expand their businesses in a competitive market. There are no major new initiatives that will impose a cost on the exchequer. Nonetheless, all the measures make it easier to do financial services business in Ireland and this is welcome.
The Special Assignee Relief Programme (‘SARP’) and the Foreign Earnings Deduction (‘FED’) will also assist in attracting key people to Ireland to work in the Financial Services industry where international assignees play an important role in the success of the industry. Over the last number of years following the abolition of the remittance basis of taxation, Ireland had lost its competitive edge and attracting key talent was a real challenge because of the high rate of income tax and other charges amounting to 52%.
Some measures outlined in the Act will impact costs in the financial services sector. For example, the abolition of the 50% relief for employer’s PRSI on employee pension contributions, the increase in savings retention tax and the increase in the VAT rate because it may not be recoverable.
Other measures, for instance, changes to the research and development credit regime could provide positive cash benefits for the sector.
Further details in relation to these changes are set out below.
The Act makes no amendments in relation to Ireland’s 12.5% corporation tax rate, thus confirming the government’s determination on this issue.
Many of the amendments related to the Irish international funds industry were sought by the industry. The measures in the Act are the result of co-operation between industry and government working together to make it easier to do business in Ireland including:
A new piece of anti-avoidance legislation has also been introduced which seeks to counteract a scheme which had been used in certain circumstances to avoid capital gains tax on the disposal of valuable shares in a company. The scheme involved the exchange of shares in the company for units in a collective investment undertaking and the subsequent disposal of those units to an offshore company. The new provisions counter such attempts by providing that where a shareholder of a company exchanges his or her shares for units in a collective investment undertaking, whether in the context of a reorganisation of the company’s own share capital or in the context of a company restructuring or amalgamation involving two or more companies, such a transaction will not qualify for capital gains tax relief under the relevant provisions of the Taxes Consolidation Act.
Prior to the Act short interest (i.e. interest other that yearly interest) paid to non treaty territories is treated as a distribution and therefore not tax deductible when paid in the context of a typical global cash pooling operation. The Act allows interest deductibility where short interest is paid to a related company in a non treaty jurisdiction on a proportionate basis depending on the tax rate applied to the recipient of the interest. If the entire amount of the interest paid will be taxed at a rate greater than 12.5% for the recipient, a full deduction should be available. Other measures relevant to the corporate treasury sector include:
The main provision which impacts the international insurance industry is the extension of group relief to Irish subsidiaries of a group where the parent company is outside the EU but is in a treaty jurisdiction or quoted on a recognised stock exchange. This extension of the definition of a group for the purposes of loss relief is not limited to the insurance sector but had been particularly sought by that sector.
Other measures relevant to the insurance industry include:
The Act introduces a number of amendments which will impact the leasing sector. In particular:
The Act introduces a number of amendments in the area of securitisation. In particular:
The Act makes two amendments in the area of Islamic finance. In particular:
In line with many recent Finance Acts, the rate of tax on savings has increased with a view to increasing consumer spending and discouraging long term savings. The increased tax on savings applies to tax on interest (DIRT), tax on returns from life assurance policies and payments made annually or more frequently from investment funds bringing the rate in each case to 30%. For payments made by investment funds less than annually, the rate also increases by 3% to 33%. The effective date for the new rates for most savings products is 1 January 2012 but for a limited category of investment funds the date can be later (8 February 2012).
Amendments have also been made in relation to the taxation of deposit interest from outside of Ireland. Deposit interest received from EU countries will be taxed at 30% if the income is returned on time and 41% if it is not. Deposit interest received from non-EU countries will be taxed at 30% for standard rate tax payers and 41% for those on the higher rate of tax or where the income has not been returned to Revenue on time.
The Act makes a number of amendments to the encashment tax regime operated by paying and collecting agents when they pay or receive payment of certain public revenue dividends or of interest and dividends of certain non-resident entities. The main changes include:
The Minister for Finance will determine when these provisions come into effect.
The Act amends the definition of “relevant territory” in relation to the taxation of foreign dividends received by companies within the charge to Irish tax. Where the dividend is received from companies that are resident in a “relevant territory”, and where such dividends that are paid out of trading profits, they will be chargeable to tax in the State at the 12.5% rate of corporation tax instead of the 25% rate.
The definition of “relevant territory” currently includes EU Member States or countries with which Ireland has a tax treaty in force or signed. It has been extended, with effect from 1 January 2012, to include territories the government of which has ratified the Convention on Mutual Assistance in Tax Matters. The convention is a multilateral agreement which promotes international co-operation on tax matters while respecting the rights of taxpayers. There are currently 32 countries that have committed to the Convention.
The 2012 Budget introduced proposed changes to Ireland’s R&D tax credit scheme. These changes were viewed very positively by small and medium enterprises and in attracting to and retaining talent in R&D activities in Ireland. The Act has provided the detail on how the Budget proposals will be implemented and set out some further, more subtle, adjustments to the legislation.
The Act has introduced a relaxation of the incremental nature of the scheme by removing the first €100,000 per annum of qualifying spend from being referenced to the base year of 2003. This is a positive step to address concerns relating to the relevance of the 2003 base year as time progresses and greatly assists smaller companies.
An additional key change is the relaxation of the restriction on sub-contracted R&D expenditure. Where a company pays an unconnected third party to carry out R&D, the qualifying expenditure is to be the greater of €100,000 or the existing 5% and 10% of total internal R&D qualifying expenditure.
Both of these new features to the scheme are clearly focused on assisting the smaller technology companies improve their financial position and to invest in future technology. These changes are relatively straight forward and will be easily accommodated in practice.
The Act introduces some restrictions in relation to payments to or from third parties for carrying out R&D activities. Claimants must consider the points below when making their R&D claims and as such may have to update their methodology or take additional steps to comply with the legislation:
A further change enables a company to surrender R&D tax credits to key employees. This will enable companies to reward employees who have in excess of 75% of their duties relating to qualifying activities and that 75% of their emoluments qualify, to reduce their personal income tax liabilities to a minimum of a 23% rate. To be eligible for this reward there are some additional conditions to be met:
Although the above restrictions place some limitations on the scale of the benefit and the number of personnel who can avail, the potential reduction in income tax payments for an individual is a highly attractive mechanism for reward and recognition. For more detail on the impact from an employee’s perspective, please see our analysis in the Income Tax section.
The changes will take effect for accounting periods starting after 1 January 2012, except for the introduction of the increased limit for sub-contracted expenditure which will apply to periods ending after 1 January 2012.
In summary, the changes are a reflection of the positive approach the Government is taking towards the R&D tax credit scheme and a number of companies are expected to benefit greatly from the changes. Companies with large and complex claims should ensure that their 2012 R&D tax credit claim process takes some of the more subtle changes into consideration.
As was indicated in the Budget in December, the three-year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for another 3 years for companies starting up in 2012, 2013 and 2014. This change is aimed at encouraging employment creation. However there is little evidence to suggest this incentive is having a significant impact on the creation of new jobs.
The Act confirms the VAT rate changes announced in the budget with the standard rate increasing to 23% from 1 January 2012.
Special Assignment Relief Programme
During the Budget statement last December specific reference was made to a new Special Assignment Relief Programme to attract key personnel to Ireland. The first step in this process covered in the Act is the removal of an existing relief which had been available over the last few years to certain foreign employees working in Ireland. The existing relief which partially re-introduced a limited remittance basis of taxation for certain foreign employees, is removed for new employees with effect from 1 January 2012. For employees engaged before this date, the old relief will continue to be available for a maximum of 5 years as follows:
The new relief is available for those arriving between 2012 and 2014 and is welcomed in that it will encourage new workers (or returning workers who have been outside Ireland for at least 5 tax years) to come to or return to Ireland. Specifically while a number of conditions apply in order to obtain the relief it is not limited to either foreign employments or non-Irish domiciles. Clearly this is designed to encourage the Irish Diaspora to return home and help the economic recovery. Subject to conditions the relief is available for 5 consecutive tax years.
In its basic form the relief will allow a relevant amount of compensation otherwise liable to tax in Ireland to be excluded from tax. The relevant amount is valued at 30% of compensation between upper and lower thresholds (€500,000 upper and €75,000 lower).
In determining whether an individual is entitled to the relief, the amount of compensation excluding:
For example an individual coming to Ireland for the first time with a basic salary of €200,000 and assuming all other conditions are met would be entitled to have their taxable income reduced for that first year by an amount of €37,500 (€200,000 minus €75,000 @ 30%) thereby generating a tax saving of €15,375 i.e. €37,500 @ 41%.
The relief is however only for income tax and does not apply for the Universal Social Charge.
Additional conditions apply for both the employee and the employer in order to obtain the relief and care will need to be taken to ensure that the detailed conditions are adhered to including the tax residence position of both the employee and employer (or associated employer) at various points. The relief is specifically designed to complement Ireland’s Double Taxation network and countries with which Ireland has a tax information exchange agreement.
On a positive note it is possible for employees and employers to obtain relief through the PAYE system so that the relief can have an immediate impact rather than waiting until the tax year end to make a claim. Employees making a claim however will automatically become chargeable persons for the year of claim which will result in a requirement to file tax returns.
Employers will also have a reporting requirement to Revenue for various details surrounding such employee claims.
Employees will however have to take care before making a claim to ensure the relief provides the best tax answer for them as making a claim will negate other possible claims which may reduce tax e.g. a Foreign Earnings Deduction, Trans-border Relief, R&D incentive and possibly the limited remittance basis that still exists.
Finally, in addition to the exclusion of a relevant amount from tax an employer will also be able to bear the cost of certain items for a relevant employee without creating an addition tax cost.
These include the cost of one return trip for the employee and family to the overseas country they are connected with as well as Primary and/or Post Primary School fees of up to €5,000 per annum per child where the school has been approved by the Minister of Education.
Overall the new relief has to be seen as a positive step in encouraging new employees to move to Ireland and specifically to encourage the Irish Diaspora to return.
Foreign Earnings Deduction
The Act re-introduces, in a limited form, the Foreign Earnings Deduction. A deduction will be available for employees working temporarily overseas in the BRICS countries (Brazil, Russia, India, China and South Africa). The deduction is subject to a maximum claim of €35,000 and shall apply for the tax years 2012, 2013 and 2014.
In order to receive this deduction the employee must spend at least 60 days working in a BRICS country in a tax year or in a continuous 12 month period. These “qualifying days” must form part of a period of at least 4 consecutive days spent working in the BRICS country.
The deduction does not apply to employees paid out of the public revenue of the State e.g. civil servants, Gardaí and members of the defence forces or individuals employed with any board, authority or similar body established by or under statute.
The deduction is calculated based on the amount of time spent working in the BRICS country and is calculated according to the following formula:
An example of how this deduction works is as follows. An individual who is tax resident in Ireland spends 120 qualifying days working in Brazil. The employment income for the year amounts to €100,000. The Foreign Earnings Deduction is calculated as follows:
|Total employment earnings||€100,000|
|Less: Specified Amount (120*X €100,000) / 365||€32,877|
The deduction is claimed at the end of the tax year when making an annual return of income for that year. A deduction will not however be claimable where another relief is claimed by the employee e.g. split year relief, Trans-border Relief, Special Assignment Relief Programme, R&D Incentive and the limited remittance basis that still exists.
The Act proposes the extension to accommodate a range of financial transactions including:
The Act has increased the rate of capital gains tax and capital acquisitions tax from 25% to 30% with effect from from 7 December 2011.