Introduction

A Finance Act is published annually in Ireland and introduces into legislation the tax provisions announced as part of the annual Budget by the Minister for Finance and other relevant amendments. The Finance Act provides for the imposition, repeal, remission, alteration and regulation of taxation. Typically, there are a number of items that have been flagged well before Budget Day/the release of the Finance Act, but there are often some unexpected additions too.

As the Finance Act updates Irish tax legislation, it is important that taxpayers give due attention to all of the provisions included in same. Finance Act 2020 included a number of headline items that were widely discussed and reported on; however, taxpayers should also be aware of and consider the other items included in the Act. Although such provisions may not be widely applicable, they are relevant to certain specific sectors/taxpayers. The focus of this article is on a selection of such technical amendments.

Headline Items in Finance Act 2020

The backdrop to Finance Act 2020 was considerable economic uncertainty as a result of both Brexit and the Covid-19 pandemic.The Finance Act 2020 provisions do not contain detailed provisions in respect of Brexit. However, measures to deal with some of the uncertainty created by Brexit have been provided for separately under “Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020”. Therefore, a significant focus of Finance Act.

2020 is on provisions to support those impacted by Covid-19. Such measures include a reduction in the VAT rate applicable to the hospitality and tourism sector, a scheme to provide funding for businesses impacted by Covid-19 – the Covid Restrictions Support Scheme (CRSS) – and tax debt warehousing measures to assist taxpayers with cash-flow issues.

In addition, Finance Act 2020 contains a number of technical amendments to clarify the operation of provisions introduced in recent Finance Acts, to ensure that such provisions operate as intended. These include amendments to the anti-hybrid tax rules, Ireland’s controlled foreign company regime, the legislation governing EU mandatory disclosure reporting (DAC 6) and Ireland’s transfer pricing regime.

Other Items in Finance Act 2020

There are also a number of independent technical amendments in Finance Act 2020, which will be of interest to certain taxpayers/ sectors:

• an increase in the rate of encashment tax and more clarity on its operation,
• the modernisation of Ireland’s professional services withholding tax (PSWT) regime and
• wider share reporting requirements.

Further detail in respect of each of these items is provided below.

What is encashment tax?

Encashment tax is a withholding tax deducted from income from public revenue dividends and dividends of a non-resident body. The individual who is responsible for the payment of the income (typically, Irish banks or other paying agents) must deduct the tax.

Public revenue dividends include dividends, interest and annuities payable out of both the public revenue of any government and the revenue of any public authority or institution.

A number of exemptions are available relating to the payment of encashment tax, which include payments to Revenue-approved charities, Revenue-approved pension schemes, certain ARFs, AMRFs and PRSAs, Irish investment undertakings, banks, building societies, life assurance companies, credit unions and s110 companies.

What are the changes?

Firstly, the rate of encashment tax is increased from 20% to 25% from 1 January 2021. This brings encashment tax in line with the rate of dividend withholding tax, which was increased to 25% in Finance Act 2019.

Secondly, also bringing encashment tax in line with similar exemptions from withholding tax available to Irish companies, an exemption has been introduced from encashment tax for Irish-tax-resident companies that are beneficially entitled to the income they receive and are, or will be, within the charge to corporation tax in respect of such income. This change also has an effective date of 1 January 2021.

Finally, there are updates to the reporting and record-keeping requirements in respect of encashment tax. Details that must be included in the encashment tax return include the name and address of the person to whom the payment is made, the amount and type of the payment, the amount of income tax deducted in respect of the payment and a declaration to the effect that the return is complete and correct. In addition, certain details must be retained by the chargeable person. The reporting and record-keeping requirements are subject to a Ministerial Commencement Order.

What is the impact of the changes?

These amendments, though unexpected, provide greater clarity, in particular in the context of certain financial institutions that may be moving to Ireland as a result of Brexit and may now be within the remit of encashment tax.

The impact of the increase in the rate of encashment tax to 25% should largely be on cash-flow rather than a real cost to taxpayers, as encashment tax is creditable against the Irish income tax/corporation tax of the recipient, with a refund available for any excess.

For companies that meet the exemption criteria, there will be a cash-flow benefit, in addition to the removal of administrative requirements.

The fact that the updates to the reporting and record-keeping requirements are subject to a Ministerial Commencement Order should allow time to update systems to report/record the correct information.

Modernisation of PWST regime

What is PSWT?

Professional services withholding tax is a tax that applies to payments to accountable persons (e.g. government bodies and local authorities) for certain professional services (e.g. medical, architectural, accountancy, financial, marketing, legal, geological) provided to relevant entities. An accountable person must deduct PSWT at the standard rate of income tax (currently 20%) from payments made for certain professional services. An accountable person must submit PSWT returns to Revenue and pay over the PSWT deducted to Revenue. The person providing the service is known as the specified person.

What are the changes?

Finance Act 2020 provides for the modernisation of the PSWT regime by providing for the electronic transfer of information, data and returns. There are also a number of small technical amendments included in the Act.

The provisions refer to a “PSWT service” for the first time. This PSWT service is explained as an electronic system such as is made available by the Revenue Commissioners to allow accountable persons to fulfil their PSWT requirements and to facilitate electronic communication between the Revenue Commissioners, accountable persons and specified persons.

The provisions outline that accountable persons will have two different types of interactions/ filing requirements with the PSWT service: submission of a notification when a payment is made and submission of an annual return in relation to PSWT.

Firstly, an accountable person will be required, on making a relevant payment, to submit a payment notification to Revenue using the PSWT service. The payment notification will need to include the following details:

• the name and address of the specified person,
• the specified person’s tax reference number,
• the amount of the relevant payment,
• the amount of PSWT deducted from the payment,
• the date on which the payment was made and
• such other information as may be required by the Revenue Commissioners.

On submission of the payment notification, the accountable person shall be provided by the PSWT service with a reference number to acknowledge the notification.

The accountable person must then provide to the specified person the following details:

• the name and tax reference number of the accountable person,
• the gross amount of the relevant payment, including the tax deducted,
• the amount of tax deducted from the relevant payment,
•  the date of the relevant payment and
• where requested, the payment notification reference number.

The due date for submission of the return and payment of the PSWT is the 23rd day of the following month.

The second category of interaction with the PSWT service is the annual PSWT return. An electronic return will be required to be filed on or before 23 February of the following year providing the following details to Revenue:

• all amounts of PSWT deducted from relevant payments during the year,
• all amounts of PSWT remitted to Revenue by the accountable person during the year and
• any amounts of PSWT owed by the accountable person in respect of relevant payments made during the year.

The provisions in respect of PSWT are subject to a Ministerial Commencement Order.

What is the impact of the changes?

Revenue has been increasing its digital capabilities over recent years, and the provision of a PSWT service is another step in this direction. The modernisation of Revenue’s interactions with taxpayers should hopefully reduce the administrative burden currently placed on both taxpayers and Revenue in relation to PSWT reporting. Again, as with the changes to encashment tax, the fact that the PSWT provisions discussed above are subject to a Ministerial Commencement Order should allow time for accountable persons to update systems to report/record the correct information.

Share reporting requirments 

What are the reporting requirements for share-based remuneration?

There are a number of annual reporting requirements that apply where employers provide certain share schemes for their employees. Employers must report certain details in respect of such share schemes to Revenue on or before 31 March following the end of the relevant tax year.

What are the changes?

Finance Act 2020 extended the scope of reporting requirements for employers in respect of share schemes. Mandatory electronic reporting by employers will now be required where:

• a discount on shares is provided to an employee/director or
• an award in the form of a cash equivalent of shares is provided to an employee/director.

In addition, Finance Act 2020 updated the existing reporting requirements for the award of convertible securities, restricted shares and forfeitable shares. Mandatory electronic reporting will now be required for such share awards. There is also a catch-all provision that applies mandatory electronic reporting to any share award to employees/directors that is not otherwise captured within the provisions.

What is the impact of the changes?

Employers have been subject to mandatory electronic reporting for share option awards for some time, and it is unsurprising that mandatory electronic reporting is being extended to other share-based remuneration. Effectively, all share awards and cash equivalents are now subject to mandatory electronic reporting.

As with the changes to encashment tax and PSWT reporting, the move to electronic reporting for share awards should ease the administrative burden for both taxpayers and Revenue.

Conclusion

There are constant changes to tax legislation for Irish taxpayers to keep abreast of. The annual Finance Act is a good starting point for taxpayers in considering whether there is updated Irish tax legislation that may be applicable to them. Although certain provisions have wide application to taxpayers, the Finance Acts typically also include a number of technical amendments that apply only to certain sectors/taxpayers. It is important that taxpayers consider each and every provision in the Finance Act and their applicability and implications.

This article discussed three such technical amendments in the areas of encashment tax, PSWT reporting and share reporting. The overarching theme of these amendments is a move to the digitisation and modernisation of reporting. This is unsurprising, as Revenue’s “Statement of Strategy 2020–2022” stated that “we will build on our advanced digital platform and PAYE Modernisation by designing innovative and dynamic systems”. This move to electronic reporting should ease the administrative burden on both Revenue and taxpayers and thereby increase the efficiency of the tax system. It is expected that this digitisation and modernisation of the tax system will be seen in other areas in future Finance Acts.

This article was first published in the Irish Tax Review, May 2021.