The Irish Finance Bill 2010

The Irish Finance Bill, 2010, was published in its initial form on 4 February, and its noteworthy features are mentioned below.

Irish Domicile Levy

The Bill contains proposed legislation to enact the annual domicile levy of €200,000 which was announced by the Minister for Finance in his Budget Speech in December 2009. The broad thrust of these provisions is as follows:

• applicable to individuals who are both domiciled in Ireland and Irish citizens;
• whose world wide income for a tax year is more than €1m;
• whose income tax liability in Ireland for the year is less than €200,000;
• the market value of whose Irish property on 31 December in the tax year is greater than €5m;
• world-wide income is computed as though the individual were resident in Ireland, in the event that he is not;
• any actual income tax liability in Ireland is creditable against the levy;
• Irish property for the purposes of the levy excludes shares in a company which is wholly or mainly a trading company, or a company which is predominately a holding company of trading companies;
• there is a look through applicable to shares in foreign incorporated closely held companies to the extent that the value of those shares is attributable directly or indirectly to property situated in Ireland.
• applicable to trading transactions only;

The determination of world wide income is to be done expressly without the application of most exemptions and deductibles.

The identity of Irish property owned by an individual is that to which the individual is beneficially entitled in possession on 31 December in a particular year. This is language borrowed from the capital acquisitions tax legislation and on that basis will include property which is in the individual’s absolute ownership, and property in respect of which the individual has a current interest in possession, whether for his life or a shorter period. It would not include property held in a discretionary trust in respect of which the individual is a discretionary object without any immediate interest in possession.

The domicile levy is to be collected on the basis of self assessment, with a return and payment being lodged with the Irish Revenue Commissioners not later than the 31 October following the tax year. The levy is placed under the care and management of the Revenue Commissioners, and all the enforcement and collection provisions applicable to other taxes are made applicable to it as well.

Irish Trasfer Pricing Proposals

The Bill, as expected, contains a provision in respect of the introduction of transfer pricing rules.

There are several reasons underlying this introduction. Ireland does still currently have some transfer pricing provisions on the statute book which are applicable in respect of companies enjoying the 10 per cent rate of manufacturing corporation tax relief which has for several years been in run-off state and is due finally to cease to have application on 31 December 2010. This regime had transfer pricing provisions to prevent the artificial enhancement of 10 per cent corporation tax profits at the expense of higher rate corporation tax profits. With the ending of the 10 per cent corporation tax regime, these existing transfer pricing provisions will cease to have effect and hence the proposed new provisions are in part a replacement.

It is also understood that the prospect of not having general transfer pricing provisions can be disadvantageous in terms of treaty negotiations and competent authority negotiations with other Revenue Authorities, and also that there is a general perception of the benefit of having transfer pricing provisions in order to complement Ireland’s position as a full and comprehensive tax jurisdiction, save only for the fact that it has a relatively low rate or corporation tax for corporate trading income.

The main features of the proposed transfer pricing legislation are the following:

• between associated persons, meaning effectively companies under common control or a company controlled by the other party to the transaction;
• arm’s length pricing applicable only to reduce an excessive deductible trading expense, or to increase an understated taxable trading receipt;
• utilising OECD guidelines on the basis of Article 9 (1) of the model treaty;
• backup paperwork required to be in existence and retained;
• not applicable to small and medium sized enterprises;
• applicable to Irish tax payers only;
• not applicable to allowances against trading income for capital depreciation (this regime contains its own effective transfer pricing provisions);
• applies for accounting periods commencing 1 January 2011 in respect of arrangements agreed upon on and after 1 July 2010 (i.e. existing transactions are grandfathered).

• These proposals are unlikely to have much significant effect on international business because the majority of structures are concerned with maximising the benefit of Ireland’s 12.5 per cent rate of corporation tax applicable to corporate trading income. Some structures also utilise Ireland for companies which are holding companies rather than trading companies, and as indicated above they will not be affected by the proposals. There is, however, one area where these proposals may have relevance, although it remains to be seen whether much consequence will ensue.

Certain multinationals utilise Irish trading companies which pay deductible expenditure to related companies which themselves are in low or zero tax jurisdictions, and which are checked for US purposes. Such deductible expenditure is therefore not recognised for US tax considerations and as a result is not imprinted with US transfer pricing considerations. However, this does not of itself mean that such payments will need to be altered under the new Irish proposals.

Under current legislation, they have had to satisfy the traditional ‘wholly and exclusively’ test for the purposes of the Irish trade. While this test, and the proposed new arm’s length transfer pricing test may not be exactly the same, they are nevertheless similar and therefore a payment which has to-date been appropriate under the traditional ‘wholly and exclusively’ test, may well be justifiable under an arm’s length test.

Enhancing Ireland's Tax Offering

The Bill also contains a significant number of additional measures aimed at enhancing the attractiveness of Ireland as a location for doing business.  Among the areas which are being addressed, and of interest to the business community, are:

• the provision of measures to facilitate the development of Islamic finance transactions in Ireland;
• increasing the attractiveness of the R&D tax credit;
• increasing the attractiveness of Ireland as a place for groups locating their holding companies through broadening the scope for applying the lower 12.5 per cent corporate tax on dividends paid to Irish companies out of the trading profits;
• extending unilateral credit relief in respect of withholding taxes on royalty income from non-treaty countries to all trading companies;
• enhancing Ireland's capital depreciation scheme, introduced last year, for expenditure on intangible assets;
• improving the attractiveness  of Ireland as a base for internationally traded services, particularly finance services;
• enhancing the remittance scheme to attract highly skilled individuals capable of stimulating economic activity; and
• expanding Ireland's tax treaty network.

• Financial Services

In his Budget speech in December, the Minister stated that opportunities exist "for Ireland to become the European hub for the international funds industry" and signposted the fact that the Government intended introducing measures to strengthen Ireland's competitiveness in the financial services sector.  The Finance Bill has followed through on that statement with a number of welcome measures.

(i)  Islamic Finance

The Government has introduced measures aimed at making Ireland attractive as a base location for Islamic finance houses that want to enter the European market and for companies that want to issue Islamic bonds.  Legislation is being introduced which will facilitate Islamic financial products, e.g. Sukuk (Islamic bonds) transactions and Shari’a compliant lending arrangements, treating these transactions in the same way as conventional financing transactions.  In essence, this means the return on an Islamic finance product will be treated as interest, and therefore deductible for tax purposes and able to avail of the various exemptions applying to the equivalent conventional transactions.

(ii)   Funds

UCITS IV

The UCITS IV Directive provides for the establishment and operation of a UCITS Management Company Passport, thereby facilitating a UCITS management company in one EU member state offering portfolio management services to investment funds in other EU member states.  Ireland is seeking to enhance its attractiveness as a hub for UCITS management companies.  Accordingly, the Bill makes clear that in the case of an Irish management company which manages non-Irish UCITS, the non-Irish UCITS will not be taxed in Ireland as a result of having an Irish management company and such funds will be treated as foreign funds for Irish unitholders.

Non-resident declarations

Generally, in order to ensure the tax neutrality of Irish funds it is necessary for the funds to obtain declarations from investors that they are not Irish resident.  This can create administrative difficulties, particularly for funds where all the investors are non-Irish resident.  As a result of measures included in the Bill it will now be possible for Irish funds to seek approval from the Irish Revenue to dispense with the declaration requirement for non-resident investors where the fund has put in place checks to ensure investors are indeed non-Irish resident.

Intellectual Property

(i)  Capital depreciation of intangible assets

Last year capital depreciation of intangible assets was introduced.  It provided for a tax deduction for capital expenditure incurred on the acquisition of qualifying intellectual property (IP) in line with the depreciation for accounting purposes or, by election, to take a tax write off over 15 years with a possible clawback of the depreciation claimed where the IP is sold within that 15 year period.  A number of enhancements to the relief have been proposed, for example: 

• the clawback period on disposal of the IP is reduced from 15 to 10 years;
• the definition of qualifying intangible assets has been extended to include applications for legal protection (e.g. applications of the grant or registration of brands, patents, trademarks, etc);
• the definition of know-how no longer focuses on manufacturing and processing but also includes commercial know-how;
• relief may be available for pre-trading expenditure; and
• the relief will extend to certain computer software.

• (ii)  R&D tax credit

The R&D credit regime is being amended to deal with situations where R&D may be carried out by a company at a number of facilities in separate geographical locations and those activities are discontinued at one or other of those locations.  The expenditure incurred by the discontinued facility in the base year 2003 can be excluded from the calculation of the group's base year expenditure, which would increase the 37.5 per cent credit currently available. This is subject to certain restrictions.

(iii)  Patent royalties

Currently there is a withholding tax of 20 per cent on patent royalty payments.  The Bill provides that such payments can now be made without the deduction of tax provided the recipient is resident in the EU (excluding Ireland) or in a Treaty country, regardless of the terms of the Treaty.  The recipient must be subject to tax on the royalty in its country or residence, the payment must be tax deductible by the payer and the payment must be made for legitimate commercial reasons.

Ireland as a Holding Company Location

The attractiveness of Ireland as a location for groups establishing their holding company has been increased with a number of proposed measures, including:

• the 12.5 per cent corporate tax rate on foreign dividends paid out of trading profits is being extended to dividends paid out of the trading profits of companies resident in non-treaty countries, where the company is owned by a publicly quoted company;
• the rules for determining the underlying profits out of which the foreign dividends are paid have been simplified;
• foreign dividends paid to an Irish company which has a holding or voting rights of less than five per cent will not be subject to Irish corporate tax where the Irish company is taxed on the dividend income as trading income;
• the requirement to have an auditor certify a company's position in order to claim exemption from dividend withholding tax is being removed and replaced with a provision permitting the foreign company to simply make a declaration and provide certain other information.

• Foreign Branch Tax Credit

Excess unused foreign tax credits in relation to branch profits can now be carried forward for credit against corporate tax arising in future years in much the same way as already applies for excess tax credits on foreign dividends.