Business tax

Transfer pricing

Section 38 of the Finance Bill introduces new transfer pricing provisions. These are intended to consolidate and expand on existing legislation and to align Ireland with international standards by adopting the OECD arms-length principles. The provisions apply to transactions between associated trading companies (see page 9).

R&D credit

The bill has introduced a new definition – an R*D development centre. Amendments have also been made to a number of definitions for the purposes of R*D tax credits. The definition of ‘‘qualified company’’ has been amended as regards record-keeping obligations of group companies carrying out R&D in separate locations.

The definition of ‘‘threshold amount’’ has been amended so that where a group ceases to use an R*D centre for trading purposes, the expenditure may be ignored in computing the threshold amount for relief purposes. The Bill provides for a claw back of relief in certain circumstances.

Section 50 also clarifies how expenditure incurred on R*D activities before a company commenced to trade is treated in computing the tax credit.

Intangible assets

Section 39 of the bill proposes a number of enhancements to the intangible assets scheme introduced in the 2009 Finance Act. It reduces to ten years the period for which a specified asset must be used in the trade to avoid a claw back of allowances.

The types of computer software qualifying for relief under section 291 TCA would be restricted to ‘end-use’ type software. The types of intangible assets covered by the scheme have been enhanced to include a broader definition of knowhow.

A further amendment ensures that capital expenditure on intangible assets for the trade incurred before commencement to trade will qualify for relief.

Royalty payments

Section 51 proposes an exemption from Irish withholding tax in respect of certain royalty payments paid to residents or permanent establishments in EU or tax treaty countries (except Ireland) where the recipient is liable to tax in that territory in respect of the payment.

Interest payments

Section 198 of the Taxes Consolidation Act (TCA) 1997 grants exemption to a company resident in a relevant territory from income tax on interest payments made by an Irish company or investment undertaking in the course of business.

Section 246 provides relief from withholding tax on the payments. The bill in Section 36 amends the sections to ensure relief will only apply where the interest payment is liable to tax in the relevant territory. In these cases the rate of tax for interest payments as set out in the relevant treaty will apply.

Start-up companies

As announced in the budget, the relief from corporation tax for start-up companies under Section 486C TCA 1997 has been extended to companies commencing to trade in 2010.

The exemption currently applies in respect of trading profits and gains of companies incorporated after October 14, 2008 and which commenced to trade in 2009. It applies for three years from the commencement of the trade.

Childcare capital allowances scheme

Section 25 of the bill proposes to terminate the scheme of capital allowances for expenditure incurred on the construction, conversion or refurbishment of buildings used as childcare facilities. Transitional measures will apply to projects in the pipeline. A termination date of 30 September 2010 will apply unless certain qualifying conditions are met.

Capital allowances on energy-efficient equipment

As noted in the budget speech, the categories of energy-efficient equipment qualifying for 100 per cent capital allowances in the year of purchase, where purchased for trading purposes, are being extended.

The new categories include refrigeration and cooling systems and catering and hospitality equipment.

Financial services/funds

The bill contains significant measures which should assist Ireland ‘‘to become the European hub for the international funds industry’’.

The proposed measures will provide clarity regarding the tax treatment that will apply to foreign funds that are managed from Ireland under the recently adopted UCITS IV arrangements.

It provides certainty that the trading activities of the Irish UCITS management company should not result in the non-Irish domiciled funds coming within the charge to Irish tax. Section 35 of the bill facilitates Islamic financing arrangements.

Income tax

Restriction of reliefs for high earners

Section 22 of the bill outlines the means of increasing the effective rate of income tax for ‘high income’ individual taxpayers to 30 per cent (previously 20 per cent) applying greater restrictions on the use of certain income tax reliefs.

* The full restriction will apply where adjusted income is over €400,000 (previously €500,000).

* The entry level to which the restriction will apply is reduced from €250,000 to €125,000.

* The formula for calculating the restriction in section 485ET CA 1997 is amended so that the amount of specified reliefs allowed is the greater of 80,000 (previously €125,000) and 20 per cent (previously 50 per cent) of the individual’s adjusted income for the tax year. This should give an effective rate of income tax of at least 30 per cent where adjusted income is over €400,000.

* There is no change to the list of specified reliefs as contained in Schedule 25B TCA 1997.

* The changes do not appear to simplify the legislation or clarify an anomaly in relation to the new reduced entry point of €125,000 and the current permitted annual income tax relief of €150,000 for BES investments

*The changes apply from2010 and subsequent tax years.

Rental income

The bill amends the order in which capital allowances and losses are deducted when computing taxable rental income.

Capital allowances arising in the year are to be deducted in priority to losses carried forward from a prior year.

Remittance basis

The bill proposes to abolish the existing remittance basis of taxation for Irish domiciled individuals who are not ordinarily resident in Ireland. Furthermore, Revenue must be satisfied of an individual’s nonIrish domicile status for the remittance basis to apply. This change applies with effect from January 1, 2010.

Special assignment relief

A special assignment relief was introduced in Finance Act (No 2) 2008 to attract key talent from overseas.

The relief applied to non-Irish domiciled individuals who are nationals of non-EEA countries and with whom Ireland has a tax treaty.

The bill extends the relief to include EU and EEA nationals who are non-Irish domiciled. In addition, the bill reduces the period of assignment to Ireland to one year from three years.

The changes will apply to individuals who come to live and work in Ireland on or after January 1, 2010.

Cross-border workers’ relief

The bill amends the relief in relation to the definition of a day to bring it in line with the definition of a day for residence purposes.

The Cinderella rule (ie, presence at midnight) still applied in relation to this relief. This change applies from this year onwards.

Domicile levy

Section 141 of the bill introduces the legislation for the new annual domicile levy of €200,000 for individuals whose liability to Irish income tax is less than €200,000, whose worldwide income for a tax year is over €1 million and whose Irish situated property is valued at over €5million on a valuation date. Some further clarification is provided following the announcement of the levy in the budget.

The levy applies to individuals who are Irish domiciled and Irish citizens regardless of residence. *Irish income tax will be allowed as a credit against the domicile levy.

It seems that to obtain credit, the income tax must have been paid before the due date for the levy. * In calculating the value of Irish property no deduction is given for borrowings.

* The valuation date is December 31 for the year in question.

* The new levy applies from 2010 and is payable on a self-assessment basis, so for 2010, the levy will be payable on or before October 31, 2011.

Reassuringly, shares in trading companies (or holding companies whose main value derives from subsidiary trading companies) are excluded from the definition of Irish situated property for the purposes of the €5 million test.

Mortgage interest relief

The main intention here was to offer support to homeowners who bought at the peak of the property boom and now find themselves in negative equity, and separately to encourage others who want to buy a house over the next three years.

The following are the main provisions in the bill:

* Mortgage interest relief is extended to 2017 for qualifying loans taken out on or before December 31, 2011. Current rates and levels of relief will apply to these loans.

* Extended relief at reduced levels will apply for those taking out qualifying loans during 2012.

* Mortgage interest relief will be abolished from 2018 onwards.

Relief for health expenses

The finance minister may deem certain treatments ineligible for tax relief where those treatments would be considered to be contrary to public policy.

There is a disallowance of general cosmetic surgery costs. Hospitals subject to some conditions no longer need the approval of the Minister for Finance before a claim for expenses can be made.

Nursing home fees will qualify for relief provided 24-hour on-site qualified nursing care is available.

PAYE credit for proprietary directors

The bill provides that the credit can only be given to the extent that PAYE has been deducted.

Restricted shares

Section 16 proposes amendments to the tax treatment of restricted shares acquired by directors or employees.

To qualify for income tax relief, the shares must be held in a trust established in the state or the European Economic Area (EEA). The trustees must also be resident in the state or the EEA.

Pensions

No changes were made to tax relief for pensions, taxation of lump sums or to caps on pension funding.

The bill contains clarification on the imputed/notional distribution from approved retirement funds (ARFs) of 3 per cent. Provisions also extend the 3 per cent notional interest to PRSAs.

Changes have also been introduced which will bring forward a benefit crystallisation event where funds are left in a PRSA rather than transferred to an ARF or used to purchase an annuity.

Capital taxes

Capital acquisitions tax Significant changes have been proposed to the Cat tax regime in the bill to simplify and streamline the administration and collection of Cat. These include the introduction of a pay and file regime for Cat.

Stamp duty

A new anti-avoidance provision has been proposed to counteract the avoidance of stamp duty on share transactions. This arises through the use of debt which ultimately benefits the shareholder directly or indirectly. Where the debt is paid by someone other than the transferee, it is to be included as part of the consideration for the purposes of stamp duty.

* Section 132 of the bill proposes amendments to the life assurance levy to exclude pension and reinsurance business.

The due date for payment of the levy will be amended.

*The bill proposes increases to the health insurance levy applicable to all renewals and new contracts with health insurers.

Carbon taxes

The carbon tax provisions are very detailed and introduce, in effect, three different schemes of taxation for; a mineral oil carbon charge, a natural gas carbon tax and a solid fuel carbon tax.

Vat Changes to the Vat treatment of public bodies are outlined, on foot of successful EU Commission proceedings.

As a result of these amendments, local authorities in particular will be subject to Vat at the underlying rates on services where there could be a distortion of competition (eg waste disposal, leisure facilities etc) and on certain other activities listed in the directive, for example port and airport services.

Where appropriate, input Vat on these supplies will be recoverable.

Anti-avoidance

A number of anti-avoidance provisions have been proposed within the Finance Bill, including:

* Restrictions will apply on allowable CGT losses in cases where arrangements were in place to secure a tax advantage

* Rent-a-room relief will not be available where the recipient is an employee or office-holder of the person making the payment

*Revenue will not approve a profitsharing scheme where certain service companies are used or where arrangements are in place for loans to eligible employees

* Arrangements whereby a less or and lessee can claim capital allowances on the same assets will be prevented.

* The exemption for dividends received by an Irish tax resident company from an Irish tax resident subsidiary will be denied in respect of dividends related to profits earned while the subsidiary was tax resident outside Ireland. This applies where the dividend is paid within ten years of the subsidiary becoming Irish tax resident.

This article is an edited summary of the ITI’s Finance Bill analysis. A full version can be found on www.taxireland.ie