Domestic and International Corporate Tax Update
This paper covers the following areas:
•
Impact of Finance Act 2011 changes
•
Transfer Pricing one year on
•
Research & Development and Intellectual Property Reliefs – the future
•
Managing your tax charge effectively
•
International Tax Developments
•
Budget 2012 changes
The focus of the paper is the impact during 2011 of various changes made earlier in the
year. It also includes an update in respect of experiences to date with R&D tax credit
claims, international tax developments of interests and a summary of the main Budget
2012 changes of relevance to companies. Finally, the paper contains some useful “year
end” tips for companies to better manage their tax charge and payments effectively.
Financing Regime
Many companies, both Irish and overseas headquartered, use an Irish financing
structure.
A typical structure (see below) involves an Irish company taking out finance, with the
proceeds used to lend interest free to a Luxembourg tax resident company. The latter
then lends the funds at market rate interest to the end user in a high tax rate jurisdiction,
say the UK.
While the Finance Act 2011 rules have severely restricted the tax effectiveness of the
above structure, there can still be a reduction in the Group’s effective tax rate if the Irish
company uses its existing reserves to lend to the UK company, via Luxembourg. This is
essentially a play on Ireland’s limited transfer pricing regime.
The Luxembourg group company should be entitled to a deemed deduction for the
notional interest paid to the Irish lender. A small margin is taxable in Luxembourg so that
the effective tax rate is circa 1.5%.
The UK borrower should be entitled to a deduction for the interest paid to Luxembourg,
subject to the usual UK rules.
A detailed review of the Finance Act 2011 changes to the interest deductibility rules is
outside the scope of this paper. However, in summary:
•
Restriction on intra group borrowings where finance used to purchase certain
assets intra-group.
•
Note certain exceptions to above, e.g. section 110 companies and leasing
arrangements.
•
Changes to section 247 interest deductions – note in particular need for 5%
material interest in company that ultimately uses the money.
•
Restrictions on interest deductibility where return on loan to foreign investee is
less than what it pays to its borrower, i.e. classic interest free loan structure.
•
Note above changes do not apply to loans in place on 21 January 2011.
Interest Free Loan Structure
• Financing of UK operations using deemed
interest deductive in Lux/Netherlands
Irish Parent
• Minimal tax in Luxembourg
Irish Co.
Int Free Loan
Lux Co.
UK OpCo.
Int Bearing Loan
© Grant Thornton
The above loan structure is an example of a structure that still works, i.e. where the Irish
lender uses existing funds to finance the UK Company, via Lux Co.
In practice, derivatives of the above structure may be used to manage a Group’s
effective tax rate. All such structures have a common purpose: to maximise the cash
value of the interest charge while simultaneously managing any related withholding tax
concerns.
Start-Up Exemption for New Companies
Finance Act 2011 extends the relief from corporation tax available to start-up companies
under Section 486C TCA 1997 to companies that commence to trade in 2011. The relief
comes under the scope of EU Commission’s de minimis aid Regulation (1998/2006).
The section allows Revenue to provide information on the tax relief claimed by
companies under the scheme to Government Departments and Agencies paying other
de minimis aid and, if requested, to the EU Commission. The section also excludes from
the scheme certain undertakings and activities which are outside the scope of the
Commission Regulation (EC) No. 1998/2006 dealing with de minimis aid.
Finance Act 2011 extended the start-up exemption regime to trades that commence in
2011 as it had previously been in place for companies commencing to trade in 2009.
The regime provides that start-up companies will be exempt from;
1. corporation tax on trading income from “qualifying trades”, and
2. chargeable gains on the disposal of trade related assets
in each of the first three years in which it carries on the trade, provided that the
corporation tax liability otherwise arising is less than €40,000.
In cases where the corporation tax liability is greater than €40,000 but less than €60,000,
Section 486C(4)(b) TCA 1997 provides for marginal relief. In cases where the
company’s liability is equal to or greater than €60,000, no relief is available. Section
486C(2)(a) TCA 1997 provides that the following shall not be regarded as “qualifying
trades” for the purposes of the start up exemption:
-
Pre-existing trades that are taken over by the company;
-
Excepted trades within the meaning of S.21A (i.e. land dealing, mineral
exploration, etc.);
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Trades which, if carried on by a close company with no other source of income,
would lead that company to be regarded as a professional services company for
the purposes of Section 441 TCA 1997
A company seeking to claim the start–up corporate tax exemption must elect to claim
such relief in its corporation tax return for the period to which the relief applies.
Finance Act 2011 introduced changes to the amount of relief a start up company can
claim in order to encourage job creation. From 2011 onwards the relief is linked to the
amount of employer’s PRSI paid by the company and /or the amount of PRSI which
would have been paid if relief under the Employer Job (PRSI) Incentive scheme did not
apply. The corporation tax relief must be restricted to the “qualifying Employer’s PRSI”
paid by the company.
Budget 2012 saw the welcome extension of the start-up exemption to 2014. Any further
tweaks to the existing relief will be introduced in the Finance Bill 2012.
Mandatory Disclosure
Finance Act 2010 introduced a mandatory disclosure regime in relation to certain tax –
related transactions. It required primarily the promoters to give details of the
transactions to Revenue, but also required the taxpayer or user of the scheme in the
following certain circumstances;
•
Where the prompter of the scheme is outside the State and there is no promoter
in the state.
•
Where there is no promoter (e.g. the scheme is devised “in house”).
•
Where the promoter is a legal professional and asserts that legal professional
privilege prevents a disclosure being made.
Under the Mandatory Disclosure legislation, a transaction must be disclosed if it gives
rise to a tax advantage and this tax advantage is the main or one of the main benefits of
the transaction and it falls within any one of the “specified descriptions”. The following is
a list of specified descriptions:
•
Confidentiality where promoter involved
•
Confidentiality where no promoter involved
•
Fees
•
Standardised tax product
•
Loss schemes – individuals
•
Loss schemes – companies
•
Employment schemes
•
Income into capital schemes
•
Income into gift schemes
Where the obligation to disclose the transaction falls on the promoter of the scheme, it
must be disclosed within 5 working days and 30 days if the transaction is disclosed by
the taxpayer. They must provide sufficient information to allow Revenue to understand
how the scheme operates and what the expected tax advantage of the scheme is. The
rules have had application from 17 January 2011 (i.e. the date the regulations were
made).
It is important to note that in Revenue’s revised guidance notes they state “Mandatory
Disclosure rules do not impact on ordinary day-to-day tax advice between a tax adviser
and a client or on the use of schemes that rely on ordinary tax planning using standard
statutory exemptions and reliefs in a routine fashion for bona fide purposes, as intended
by the legislature”.
We understand that to date there have been few disclosures made to Revenue under
the mandatory disclosure legislation.
Financial Services
Introduction
For many years Ireland has had a reputation as a location of choice for the significant
players in the financial services sector, with the IFSC housing the key names. Tax was
often cited as a key component of our attractiveness; Ireland could offer a regime that
provided both a positive tax answer and clarity in reaching that answer. The latter point
often differentiated us from competing regimes.
Finance Act 2011 further enhanced the benefits of Ireland by making additional
improvements to the securitisation regime for section 110 companies. The changes
made include:
• Increasing the range of assets that qualify under section 110, to include
commodities.
• Carbon offsets included as qualifying assets to enhance Ireland’s green sector
credentials.
• Range of qualifying activities widened to include the leasing of plant and
machinery.
• Anti-avoidance provisions to deny deduction for certain profit dependent interest
payments.
The above changes do not impact on existing loans in place before 21 January 2011, or
where there was a binding agreement in place before that date.
In a non-tax development, changes in our company law have enabled foreign funds to
re-domicile to Ireland. This was a very welcome development as it coincided with an
increased demand from investors for access to regulated funds. 2011 saw the first signs
of the benefit of this change, with an increased flow of offshore funds locating here.
Budget 2012 flagged the introduction of further positive initiatives for the Financial
Services Sector, with details to be provided in the Finance Bill 2012.
Transfer Pricing
Introduction
Finance Act 2010 introduced general transfer pricing provisions into Irish tax legislation.
These provisions apply to both domestic and cross border trading transactions between
associated parties, with effect for accounting periods commencing on or after 1 January
2011.
There is an exemption from the new transfer pricing provisions in respect of
contracts/terms which were already in place on 1 July 2010.
Transfer pricing is a key issue facing multinationals. The introduction of the “arm’s length
principle” into Irish tax legislation brings us into line with most, although not all, of our EU
partners.
What does it mean for affected companies? Broadly, intra-group transfer prices should
be similar to those that would be charged between independent persons dealing at arm’s
length in otherwise similar circumstances. The legislation will include situations where
either expenses have been overstated or receipts have been understated (if arm’s length
principles were followed).
The OECD has published comprehensive guidance notes on transfer pricing in “Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations”. The arm’s
length principle itself is incorporated into Article 9 of the OECD Model Tax Convention
on Income and Capital. It is the OECD guidance that should be used when analysing
whether a transaction has been entered into at arm’s length.
Existing transfer pricing provisions
An important point to note is that the principle of arm’s length already existed preFinance Act 2010 in Irish tax legislation. For example, section 81 TCA 1997 dictates that
a tax deduction is only available for an expense wholly or exclusively laid out or
expended for the purposes of the trade of the company. While the arm’s length principle
is not explicitly referred to in section 81, Revenue are in effect entitled to adjust the price
paid for goods or services for tax purposes and deny a deduction if appropriate.
There are also various provisions in Irish tax legislation which require the application of
market value pricing to transactions between connected parties. These are generally
included as anti-avoidance provisions and would cover, for example, certain land
transfers between connected persons and disposals of assets between connected
persons.
Case law has also provided some guidance on the application of arm’s length principles.
The most relevant case in this regard is Belville Holdings v Cronin [1985] IR 465.
Finally, transfer pricing provisions could also be found in the manufacturing relief
provisions of TCA 1997. The cessation of the 10% regime on 31 December 2010 has
allowed the legislators to consolidate the various arm’s length principles, thus providing
more clarity for the taxpayer.
Legislation
The new legislation is included in a new Part 35A of TCA 1997. Sections 835A-G include
the new transfer pricing rules.
Only trading transactions are caught
The new provisions only apply to transactions that are trading in nature and are taxed
under Case I or II of Schedule D, whether at 12.5% or 25%. Thus passive income such
as rental income will not be within the ambit of the new legislation. Similarly, interest
income in the context of non-trading loans will not be caught by the new provisions.
The exemptions are important and mean that many classic tax efficient financing
structures should not be impacted by the changes. For example the provision of an
interest free loan will not be caught under the new provisions provided it is not extended
in the course of a trade.
An important point to note is that the transfer pricing provisions apply to any
“arrangement”, defined as “any agreement of arrangement of any kind” (whether or not it
is, or is intended to be, legally enforceable). Thus having an unwritten understanding
between two companies could potentially be caught by the new legislation.
Grandfathering provisions
It is not unreasonable to speculate that many existing non-binding/unwritten agreements
were properly documented on or before 1 July 2010 in order to benefit from the
grandfathering provisions. Such agreements secure the non-application of transfer
pricing going forward, provided the future income/expense is derived from the contract in
place on 1 July 2010. Any deviation from that agreement may mean that a new
agreement is deemed to have commenced for transfer pricing purposes, meaning that
the grandfathering provisions will not apply (see Tax Briefing No. 7 issued in June 2010).
Penalties
There are no specific transfer pricing penalties included within the legislation. On this
basis, it is likely standard interest and penalties would apply where any adjustment to
taxable profit is made.
Adjustment made overseas
Where an adjustment is made to taxable profit in an overseas jurisdiction, a refund of
Irish tax will only be available if there is a double tax treaty in place. In practical terms,
the 4 year time limit for amending an assessment is likely to cause difficulty in this
regard.
Domestic transactions adjustment
The legislation contains provisions to allow an offsetting adjustment to related parties
when a transfer pricing adjustment is applied to domestic transactions between
associated parties that are both subject to Irish tax. However, if one party has tax losses,
then the adjustment may mean an increase in the overall cash tax payable by the
parties. It is also possible that the transaction may be treated differently in the books of
the counterparty.
Exemption for SMEs
The new rules do not apply to small or medium sized enterprises. The key requirement
in this regard is that the overall enterprise must have less than 250 employees and
either turnover of less than €50m or assets of less than €43m. These thresholds are to
be applied on a global consolidated basis and the economic interests of controlling
individual shareholders must be taken into account in applying the tests.
Documentation requirements
The legislation requires supporting documentation to be prepared on a timely basis.
There is no detailed guidance in either the legislation or in Revenue’s guidance notes
(see Tax Briefing No. 7 - 2010) as to minimum requirements in respect of
documentation.
In many cases, documentation will already be in place if a counterparty is subject to
transfer pricing, for example, in a transaction between a UK parent and its Irish
subsidiary where UK transfer pricing documentation has been prepared. In such cases,
it is unlikely that any additional Irish transfer pricing documentation will be required.
While there is no specific requirement for contemporaneous documentation (although
the documentation must be prepared on a “timely basis”), it would be helpful if some
work was carried out at the time the transaction was entered into supporting the arm’s
length pricing. Typically, it is easier to do this at the time the transaction takes place than
having to carry out an exercise retrospectively.
Summary
Given our 12.5% corporation tax rate, it may seem unlikely that many companies will be
impacted by the new transfer pricing rules. However, at a minimum, there is an onus on
companies to ensure that there is sufficient back-up documentation available supporting
existing arm’s length pricing policies. The expectation is that that this will not create a
considerable additional administrative burden as most companies will already have
counterparty documentation in place. Thus the new provisions should not detract from
our attractiveness as a location for FDI.
We are still waiting for the first wave of Revenue Audits in this space. Revenue have
stated publicly that they will be policing this area so we should get an early indication of
trends later in 2012.
Research and Development Tax Credit
Finance Act 2011 amended the definition of eligible expenditure for the purposes of the
R&D tax credit. The R&D tax credits and capital allowances under the intangible assets
regime cannot be claimed on the same expenditure.
Given that the R&D tax credit represents a potential 25% refund of costs incurred, it is a
very significant tax break. Combined with the standard corporate tax deduction for R&D
(valued at 12.5%), it means that companies incurring qualifying R&D can claim a refund
from the taxman of €37.50 for every €100 expenditure.
While many companies are carrying out R&D work that qualifies for a tax credit, only a
minority are actively claiming the credit. The main reason for companies not claiming the
credit is the persisting misconception that it relates solely to “men in white coats”.
In reality, nothing could be further from the truth. Most companies across all sectors are
involved in some form of innovation or process improvement. In many cases, the related
costs will qualify for the R&D tax credit.
The tax credit can now be received as a direct cash refund from Revenue, regardless of
the corporate tax position. The only restriction is that the R&D credit refund cannot
exceed the PAYE/PRSI remitted by the company to Revenue in the year, which will
rarely cause a reduction in the credit available (it can regardless be carried forward to
future periods).
The R&D credit is available in respect of expenditure such as salaries, consumables
used in the R &D process and plant and machinery used wholly or partly for R&D
purposes. The credit is also available in respect of buildings used wholly or partly for
R&D purposes, subject to certain conditions.
The range of activities that the R&D credit can apply to is extremely wide.
Improvements to plant performance, improvements to production output and
improvements to existing processes are examples of activities carried on by many
companies, and which can qualify for the R&D tax credit.
The 13 key questions which should be addressed when making a claim include:
1. The field of science and technology concerned.
2. A detailed description of:
•
The R&D activities.
•
The methods used (i.e. systematic, investigative or experimental
activities within the given field of science and technology).
•
The objective of the research and development.
3. The specific scientific or technological advancement that the company
sought to achieve.
4. The specific scientific and technological uncertainty the company
sought to resolve by these activities.
5. The date the R&D activity began.
6. The date the R&D activity ended, or state if it is still ongoing.
7. Whether any R&D expenditure was paid to a university or institute, or to
external subcontractors, and if so, the total amount paid.
8. Whether any grants were received, and if so, the total amount received.
9. The qualifications, skill and experience of the project manager.
10. The numbers, qualifications and skill levels of other personnel working on
the project.
11. A separate itemised analysis of qualifying cost for each accounting period
in relation to each project.
12. Where cost has been attributed to R&D activities by apportionment of a
greater cost, the method of and basis for such apportionment must be
disclosed.
13. The computation of the tax credit claimed in respect of each accounting
period, showing clearly the threshold amount.
The experience with Revenue Audits of R&D tax credit claims in 2011, particularly later
in the year, is an increasing focus on the “science” element of the claim.
Revenue have expanded their list of questions in recent months to address their
concerns regarding the ability of claimant companies to meet the science hurdle. A key
requirement for companies is thus the maintenance of adequate evidence of their
qualifying R&D activities. Any responses to queries raised by Revenue should be
sufficiently detailed to enable Revenue determine the qualifying nature of the R&D
activities.
Budget 2012 saw a very positive development with the relaxation of the 2003 base year
rule for the first €100k of R&D spend. This will primarily benefit smaller companies and
is to be warmly welcomed.
In a further interesting development announced by the Minister on Budget Day, a portion
of the company’s tax credit can be awarded to key personnel involved in the R&D, tax
free. The mechanics of this are as yet unclear but to an extent it reintroduces the
concept of the old patent royalty exemption but with one key difference. Whereas the
patent royalty exemption could be used to reward executives not involved in the actual
invention, the new relief will apply only to awards to those involved in the R&D itself.
Intellectual Property
Finance Act 2009 introduced Section 291A TCA 1997, which provides tax relief for
expenditure incurred on intellectual property (“IP”).
It is aimed at supporting the
development of the knowledge economy by encouraging companies to locate the
management and exploitation of their IP in Ireland with the potential to create highquality employment in the process.
Section 291A TCA 1997 provides that companies that incur expenditure from 8 May
2009 onwards, on the acquisition of certain categories of IP will be entitled to tax relief in
the form of wear and tear allowances.
In order for the company to qualify for relief, the IP must meet the two following
conditions:
¾ The asset must be treated as an intangible asset in accordance with generally
accepted accounting principles (GAAP). Per IAS 38 an intangible asset is an
“identifiable non-monetary based asset without physical substance”;
¾ The asset must be a “specified intangible asset” within the meaning of Section
291A(1) TCA 1997. Section 291A(1) TCA 1997 sets out 12 categories of assets
that may be regarded as “specified intangible assets” and includes a wide range
of assets ranging from patents and drug licenses to registered designs, trade
names and copyrights.
Also, the expenditure must be incurred for bona fide commercial reasons and not as part
of any tax avoidance scheme.
The wear and tear allowances can be claimed in one of the two following ways:
I.
In line with the rate of amortisation of the intangible asset in the financial
statements of the claimant company (Section 291A(3) TCA 1997); or
II.
At 7% per annum for years 1 to 14 and 2% in year 15 (Section 291A(4)
TCA 1997).
Where a company elects to claim wear and tear allowances in accordance with the
second option above, they must make such an election in their corporate tax return for
the period in which the expenditure on the asset is first incurred and such an election will
apply to all expenditure incurred on that asset (Section 291A(4)(b) TCA 1997).
The wear and tear allowances provided for under Section 291A TCA 1997 may only be
offset against income deriving from “relevant activities”, being activities carried on as
part of a trade which consists of managing, developing or exploiting specified intangible
asset/s and includes the sale of goods or services that derive the greater part of their
value from such IP assets, or contribute to the value of goods or services by using the IP
assets in the delivery of such goods or services. Essentially there must be a reasonably
clear link between the income and the holding of the IP assets in order for that income to
be regarded as deriving from “relevant activities”.
It is key that any company seeking to claim these allowances can demonstrate that they
are using the IP as part of a trade. This is most likely to give rise to uncertainty in cases
where companies do not use the IP in the manufacture of goods or delivery of services,
but hold IP and licence that IP to other parties. Depending on the circumstances, such
an activity may not be regarded as trading with the licensing income treated as passive
income and as a result no availability of allowances under Section 291A TCA 1997. It
should be noted that in Tax Briefing 9 of 2010, Revenue have stated “the mere holding
of an asset by a company from which a licence fee or royalty income received would not
be regarded as a trading activity and capital expenditure incurred by the company on an
asset for such purpose would not qualify for relief under the scheme (Section 291A TCA
1997) as the asset is not used in a trade”.
In determining whether a company is engaged in a trading activity it is important
to consider the usual factors such as the Badges of Trade, number and skills of the
employees involved, etc. There is a significant amount of Revenue guidance available
on the Revenue website (www.revenue.ie) with respect to this issue such as;
•
Tax Briefing 57,
•
Revenue Statement of Practice on the Classification of Activities as Trading, and
•
Revenue List of Opinions on the Classification of Activities as Trading.
Revenue have agreed to give advance approval in cases of doubt as to whether
they would regard activities as trading activities.
Use of allowances
Section 291A(6) TCA 1997 restricts the amount of wear and tear allowances that can be
claimed so that no more than 80% of the income deriving from “relevant activities” is
sheltered using these allowances.
In periods in which the amount of allowances breaches the 80% threshold, any excess
allowances are carried forward and claimed in the next accounting period, subject to the
80% threshold in that period.
Section 291A(5) TCA 1997 requires that in circumstances where “relevant activities” are
carried out as part of a company’s business, the “relevant activities” should be regarded
as a separate trade, with any necessary apportionments of income and expenses
carried out on a just and reasonable basis.
While beyond the scope of this paper, Section 247(4B) TCA 1997 can place restrictions
on the amount of interest relief that can be claimed by companies borrowing money to
lend to or acquire shares in companies that are claiming allowances under Section 291A
TCA 1997.
Updates to Section 291A 1997
Finance Act 2010 introduced a number of updates to Section 291A TCA 1997
•
The clawback period for capital allowances has been reduced from 15 years to
10 years. This means that provided a company holds an IP asset for at least 10
years there should be no clawback of allowances previously claimed where the
asset is subsequently disposed. The 10 year clawback time limit does not apply
where assets are disposed to a connected company that seeks to claim
allowances on the assets.
•
The list of specified intangible assets in Section 291A TCA 1997 has been
extended to include applications for patents and copyrights.
•
The definition of know-how has been amended to include commercial and
scientific know-how rather than only industrial information and techniques as was
previously the case.
•
Computer software is now effectively broken up into two categories:
-
“Own use” – i.e. software used within a business such as software
applications for computer systems or computer-operated equipment
used in a company's business will continue to qualify for the normal plant
and machinery allowances under Section 291 TCA 1997;
-
“Exploited software” – i.e. software IP which is commercially exploited by
a company such as being licensed to third parties etc. should qualify for
allowances under Section 291A TCA 1997. There is a transition period
of two years whereby a company may elect to claim normal wear and
tear allowances under Section 291 TCA 1997 in respect of capital
expenditure incurred up to 4 February 2012 on computer software used
for commercial exploitation.
•
The legislation has been updated so that companies who choose to claim
allowances in line with their accounting amortisation will be entitled to claim an
allowance for any impairment of the IP asset that is charged to the income
statement.
•
The legislation has been amended to specify the activities involving the use of
specified intangible assets that constitute a separate trade (referred to in Section
291A(5) TCA 1997 as a “relevant trade”).
Other Points to Note
(1) Goodwill
Goodwill is included in the IP scheme to the extent that it is recognised as an intangible
asset under GAAP and is directly attributable to any of the other specified intangible
assets listed in Section 291A(1) TCA 1997. Only goodwill that is externally acquired is
recognised as an intangible asset under GAAP and thus, internally generated goodwill is
not regarded as an intangible asset and consequently, it not included in the intangible
assets scheme.
(2) Acquisition of Intangible Assets from Connected Parties
Relief is available for capital expenditure on the acquisition of specified intangible assets
whether these are acquired from a third party or from a connected person. However, the
following provisions of Section 291A TCA 1997 are relevant:
¾ Allowances are based on the amount of capital expenditure incurred on the
acquisition of the assets;
¾ An arm’s length rule applies such that qualifying expenditure may not exceed the
amount that would have been paid or payable for the asset between independent
parties acting at arm’s length; and
¾ Where intangible assets are transferred between group companies, allowances
are not available where the transfer is subject to capital gains tax group relief
under Section 617 TCA 1997. However, the companies may jointly elect not to
avail of the group relief under Section 617 TCA 1997, in which case the
transferring company will be chargeable to capital gains tax on the transfer. A
balancing charge may also arise where the transferring company had been
claiming capital allowances on the asset transferring.
(3) Pre Trading Expenditure
Where a company incurs expenditure prior to the commencement of a trade on specified
intangible assets for use in a trade that it intends to carry on, allowances may be claimed
once the trade is commenced and the asset is brought into use in the trade.
The
company can start claiming such allowances from the accounting period in which the
asset was first brought into use.
(4) Royalty Payments
The acquisition of an intangible asset may include annual royalty payments in addition to
an upfront payment and the royalties may be capitalised on the balance sheet. Royalty
payments are revenue expenditure for tax purposes and notwithstanding the accounting
treatment, such payments would not qualify for allowances under Section 291A TCA
1997, which are made by reference to capital expenditure (for tax purposes).
The above relief has been availed of by several large MNCs in 2011 as part of a
migration of IP to Ireland. The hope is that the development of the IP in Ireland will
create additional jobs here.
Managing your Tax Charge effectively - Year End Issues for Companies
It is a worthwhile exercise to review the financial and tax situation of a company to
identify opportunities that may require action before the year end. Below are some of
the main areas that can be considered in this regard:
(1) Utilisation of losses
Current year trading losses are firstly carried back to the prior period to be utilised
against trading profits. Any excess losses can be set against other income and
chargeable gains arising in the same period.
In light of the current economic climate, companies should review the carrying value of
their trading stock e.g. land. Any write-down should be tax deductible. This should
reduce the corporation tax liability for the current year and, depending on the
circumstances, may result in a tax refund for the previous year, assuming the company
paid tax in respect of the earlier year.
(2) Maximising interest deductions
Companies should ensure they are securing a tax deduction on all financing costs.
Some interest costs may not be tax deductible, however.
Note that certain interest deductions, particularly under section 247 TCA 1997, are
generally lost if not utilised in the current year. With care, these losses can be
preserved.
(3) Early filing
If you are due a refund of tax e.g. over-payment of preliminary corporation tax, you
should look to file the corporation tax return as soon as possible in order to obtain the
refund at the earliest possible opportunity. Effectively this is an interest free-loan to
Revenue. Revenue can in certain circumstances withhold repayment of tax refunds for
up to 3 months without paying any interest.
(4) Income recognition
It may be possible, depending on the accounting policy of the company, to defer income
recognition until the following year end. Any associated tax payments on income
deferred would be delayed by 12 months.
(5) Stocking up/accelerating deductions
There may be opportunities to purchase items your business will require in the
immediate future. If there is a need for goods and services in the first quarter of the
forthcoming year, it may be beneficial to purchase them now, if cash flow permits.
Depending on the method of accounting, consider stocking up on office supplies e.g. fax
paper, printer cartridges, stationery and other office items. There is no advantage in
purchasing goods that are held as trading stock; the cost of these goods would be
included in closing stock at the year end without impacting taxable profit.
(6) Bad debt provisions
Relief for bad debts is given for tax purposes where it is shown to the satisfaction of the
Inspector of Taxes that the debt is bad. A deduction is also available for doubtful debts
to the extent that the basis for estimating debts to be bad is specific, i.e. a specific bad
debt provision. Claims in respect of bad debts are made when filing the relevant
corporation tax return.
A VAT refund in respect of a bad debt can be claimed where it can be demonstrated that
the debt is not recoverable.
(7) Capital allowances
Capital allowances are available on plant and machinery and some buildings. You can
deduct a proportion of these costs from your taxable profits and reduce your tax bill. To
qualify for capital allowances, the plant and machinery must be in use for the purposes
of the trade at the year end. If you intend to buy new plant and machinery early in the
following period you might consider purchasing it before the year end to get an
immediate allowance in the current year. It should be noted that if additions are made in
December and the year end is 31 December, you should be entitled to capital
allowances for an entire year notwithstanding the fact that the assets were only being
used for 1 month of the accounting period.
Where fixed assets additions qualify as eligible energy efficient capital equipment, the
company can deduct the full cost of this equipment from their profits in the year of
purchase. The equipment eligible for such allowances can be found on the specified
products list issued by Sustainable Energy Ireland.
(8) Crystallise losses on capital assets
If you are holding assets e.g. share investments, that if sold would create a loss, you
might consider crystallising these losses to be offset against capital gains. This
effectively locks in the loss and acts as a gross roll up vehicle for future gains; excess
losses can be carried forward to future periods. Current year losses may also reduce
gains made earlier in the period.
A review of a company’s investment portfolio should be carried out before the year end
to identify opportunities to crystallise losses and any negligible value claims. Care should
be taken not to fall foul of the “bed and breakfast” rule i.e. if the shares are reacquired
within 4 weeks, the loss is ring fenced. However, there are methods to overcome this
restriction.
(9) Change of year end
A change of year end can be useful in group situations. Companies may consider
shortening or lengthening their accounting period (subject to company law) which could
maximise the amount of losses being transferred from one company to another. Only
contemporaneous losses can be surrendered and claims are limited to profits of a
corresponding period. Where accounting periods are shortened, payment of tax liabilities
may be accelerated. For seasonal businesses, it can be beneficial to choose a year-end
date just before a seasonal surge in income and profitability.
(10)
Termination payments
From 01 January 2011 any ex-gratia termination payment in excess of €200,000 will be
taxed at the individual’s marginal rate of tax.
The extent to which an ex-gratia payment is taxable is dependent on the individual’s
earnings, length of service and a formula is applied to factor in the extent of the pension
lump sum (received or receivable) from the qualifying pension scheme.
The introduction of a €200,000 limit imposes an effective cap of €200,000 on such
payments to be made in the future.
(11)
Pension payments
While a cap has been introduced on the value of a pension fund, this is one of the most
efficient ways of extracting wealth from a business. A company is entitled to a tax
deduction for contributions paid to an approved pension fund for employees and
directors. On reaching retirement age, an individual can extract 25% of the fund value
(subject to certain limits) tax-free and use the balance to purchase an annuity or, more
likely, invest in an approved retirement fund (ARF).
To ensure the pension contribution is available for corporation tax purposes, the
contribution must be paid and not accrued at the year end.
It is important to be aware that the maximum allowable value of a pension fund is €2.3
million. Further caps may be introduced.
Going forward, planning around corporate contributions may become more attractive.
Common Consolidated Corporate Tax Base (“CCCTB”)
Currently, across the EU each jurisdiction operates its own distinct tax system. CCCTB
would effectively consolidate the taxable profits of EU group companies under common
control and the tax base of companies with offices across Europe would be calculated
centrally.
The “tax base” would be determined by applying a broad concept of income and there
would be detailed rules setting out deductible and non-deductible expenditure for tax
purposes. Even arriving at a universal definition of the tax base would likely prove
difficult given the divergence in accounting policies and various other complex areas
associated with what constitutes taxable profits. It has been cited that the income and
expenses would be recognised on an accruals basis. The objective is that there would
be a consistent approach across the EU in computing taxable profits.
Under the CCCTB policy, tax rates would not be harmonised at the outset and national
tax rates would be applied to the tax base attributable to each EU country.
As part of the proposals, there would be a methodology introduced whereby the taxable
profits of a company or group of companies would be allocated between the various EU
Member States. It is likely that the allocation would be done by way of a three-factor
apportionment formula, which would be based on sales, labour and assets. This
allocation process would determine the quantum of the overall European tax base, which
will be subject to taxation in each country.
Under the CCCTB regime, it is possible that there would be one tax computation and
one tax return for groups with operations spanning the EU. It is purported by some that
this would reduce the costs associated with corporation tax compliance and may release
certain losses. However, research has shown that the CCCTB could actually push up
average compliance costs. The costs of preparing and filing the tax return and
associated administration could exceed the benefits arising from the reduced
requirement for transfer pricing.
Impact on Irish Business & Foreign Direct Investment (FDI)
The adoption of the CCCTB could result in a reduction in Ireland’s tax intake. Ultimately,
the CCCTB could negate significant benefits associated with having lower corporation
tax rates in Ireland. Importantly, CCCTB may also result in an overall reduction in the
EU corporation tax intake.
Significant interest groups are opposed to the introduction of CCCTB and hold the view
that the proposal would result in increased tax bills as taxable profits would be
transferred to regions with large populations. Therefore, it would result in the transfer of
resources from smaller countries to larger ones.
If the CCCTB were implemented, there is a possibility that tax treaties between EU
countries would be eliminated and there may be a requirement to renegotiate treaties
with non-EU countries. Also, the transfer pricing legislation for transactions between
European countries would be rendered invalid. Discussions regarding treaty provisions
is a key aspect of the negotiations currently taking place between Member States, right
up to time of writing in December 2011.
The CCCTB may damage Europe and Ireland’s ability to attract FDI. This is partly due
to the fact that tax payable by multinational companies (MNCs) would be determined by
a complex formula which can only be calculated retrospectively as opposed to by the
current laws of the relevant EU Member States. Thus, it would be extremely difficult for
MNCs to forecast tax charges and it could disincentivise MNCs from locating in Ireland
and also in the EU, thereby limiting FDI flowing to Ireland.
Overall, the CCCTB represents a complex and cumbersome option, which could be
detrimental to the competitiveness and attractiveness of both Ireland and the EU as
investment platforms.
It should be stressed that unanimity is required for all decisions to be taken on taxation
issues. However, the “enhanced co-operation” procedure may be used whereby a group
of countries can introduce common EU rules that apply only to them. This may put nonparticipants at a disadvantage if the procedure is backed by a significant number of
countries. Current discussions between key Member States will be key to the future
prospects for the CCCTB.
Ireland has stated publicly that it is committed to examining the CCCTB proposals and to
participating fully in the ongoing negotiations. This is notwithstanding the potential risk
to the Irish Exchequer if the proposals are ultimately implemented.
CCTB
More recently, France and Germany have announced plans for a Common Corporate
Tax Base between the 2 countries by 2013. This could be seen as step one of the
CCCTB, with many commentators concerned that we seem to be moving towards an era
of fiscal policy controlled by the European Commission as opposed to Member States.
Summary
To conclude, the implementation of CCCTB is likely to significantly dilute the benefits of
a low corporate tax rate. While we are still some way off the introduction of the CCCTB,
France and Germany are keen to push forward with CCTB proposals by 2013, which
may gain traction with some other EU countries. If introduced, CCCTB would pose
many practical problems and there is a degree of opposition to the proposals across the
EU. Its merits appear to be significantly outweighed by the costs associated with it.
However, Ireland, like many other countries, is actively engaged in the negotiations
stages.
Holding Company Regime
Moving to Ireland
There has been much publicity in recent times, particularly in 2009 and 2010, over the
number of large multinational companies moving their headquarters to Ireland. While
these companies have been quick to point out that tax is only one of the reasons for their
arrival here, it is clear that Ireland’s tax regime is a key factor.
Holding Company Regime
An attractive holding company regime is an important part of the drive to attract FDI to
Ireland. On its own, the location of a Group’s HQ here may not signify much in terms of
jobs growth or represent a significant boost to Ireland’s economy. However, it represents
a hook capable of attracting additional investment and as such it is a significant part of
our armoury.
Over the past number of years many changes have been introduced to Ireland’s holding
company regime. In general, these have been positive moves and have encouraged
foreign multinationals to locate here. Ireland currently exempts capital gains derived from
the sale of tax treaty resident foreign subsidiaries. While there are certain restrictions, in
particular regarding trading status, the rules are broadly similar to our European
counterparts.
However dividends received by an Irish holding company from foreign subsidiaries are
still subject to tax in Ireland, albeit at lower rates (following recent Finance Act changes)
and with a credit for the foreign tax suffered. However, the system is both unnecessarily
complex and less favourable than similar regimes across Europe. The complete
exemption of dividends received from tax treaty countries would greatly simplify the
existing system and provide greater incentive to companies to repatriate profits earned
abroad. While Budget 2012 contained no further news in this respect, there is still the
possibility that Finance Bill 2012 will introduce a more practical and business friendly
dividend exemption system.
Summary of key tax attributes of Ireland as a holding company location
Ireland, as a holding company location has a number of merits including the following:
•
A 12.5% tax rate applies to trading profits while a 25% rate applies to passive
investment income.
•
Dividends received from a company in an EU or tax treaty country are liable to
corporation tax at 12.5% provided the dividend is paid out of trading profits.
•
Also, the 12.5% tax rate applicable to foreign dividends will include dividends
from non-treaty / non-EU locations where the company paying the dividend is
quoted on a recognised stock exchange in another EU Member State or a tax
treaty country or is owned directly or indirectly by such a company.
•
Ireland’s treaty network could be considered medium to high. Ireland has 49
comprehensive double tax agreements in place.
•
Irish holding companies may be exempt from capital gains tax upon the disposal
of shares in certain subsidiaries once certain conditions are met.
•
Ireland does not have any thin capitalisation or CFC legislation.
•
Ireland has only limited transfer pricing legislation in place.
•
Other tax incentives available in Ireland for holding companies include -
o
Intellectual property relief – tax relief in the form of capital allowances is
available for expenditure incurred by companies on a wide range of
intangible assets.
o
Research and development – a potential 25% tax credit is available in
respect of expenditure on qualifying research and development activities
within the European Economic Area. There is flexibility in the system such
that a refund may be available in certain circumstances where the
corporation tax liability is insufficient to claim the credit
Foreign tax credits – where foreign tax has been paid on the underlying
profits out of which foreign dividends are paid from a subsidiary, relief
should be available in respect of the foreign tax paid. Any unused foreign
tax credits may be pooled and offset against other foreign dividends.
Migration of Head Office to Ireland
What are the key points to note in moving a holding company to Ireland?
•
Typically, a non-Irish incorporated but Irish resident company becomes the new
holding company.
•
This produces significantly reduced reporting requirements.
•
There is no requirement to file accounts in Ireland.
•
If no existing presence in Ireland, there is a requirement to have enough
substance in Ireland to establish tax residence of holding company.
Using Ireland as a location to hold Intellectual Property
As noted earlier, Ireland can also be used as a location to hold IP. The diagram below
outlines opportunities in this regard.
Management of IP using an
Irish Trading Company
UK
Parent
Benefits
• Tax efficient management of
intellectual property for UK and
multinational companies using
an Irish trading company to manage the
IP.
Transfer of
IP
IRE Co
trade co
Royalties
Foreign
Subs
Royalties
License to
use IP
Foreign
Third Party
• Tax deduction in Ireland for the IP
acquired. Net profits subject to 12.5%
tax.. Important that management of IP
constitutes "trading“, substance key.
Maintaining residence of IreCo
also crucial.
• R&D / patent relief ?
• Careful planning required on
migration of IP from UK.
© Grant Thornton
Recent Double Tax Agreements
Ireland currently has 56 treaties that are in force while it has signed comprehensive
double tax agreements with 65 countries.
New agreements with Georgia, Moldova, Singapore, Serbia and Turkey came into effect
on 1 January 2011.
A new agreement with Hong Kong has been signed and the legal procedures to bring
the new agreement into force are being completed and this will be effective from 1
January 2012.
Legal procedures to bring new agreements signed with Albania, Kuwait, Montenegro,
Morocco and United Arab Emirates into force were completed in February 2011.
New agreements with Armenia, Panama and Saudi Arabia were signed on 14 July 2011,
28 November 2011 and on 19 October 2011 respectively.
Compared with other holding company locations, Ireland does not have an exceptional
treaty network. To increase our attractiveness in this regard, it is important that we
expand our current treaty network significantly.
Ireland’s existing treaty network with Asian countries is weak. Many investments into, for
example China, are structured through Hong Kong. The historic absence of a treaty with
Hong Kong put us at a significant disadvantage compared with other European holding
company competitors (such as Luxembourg or Belgium).
Ireland has also signed several exchange of information agreements. These agreements
allow Revenue to request information from the tax authorities in the relevant State,
where such information is relevant to an Irish tax investigation – for example, bank
accounts or the beneficial ownership of companies or trusts. Agreements have been
signed with Cayman Islands, Gibraltar, Liechtenstein, Samoa, St Lucia, The British
Virgin Islands, The Cook Islands, Antigua & Barbuda, St Vincent & The Grenadines,
Turks and Caicos Islands and Anguilla.
The Revenue website is updated regularly for developments in the tax treaty space.
A final point to note in the area of tax treaties is to be aware that the existence of a treaty
is often sufficient to obtain a relief under Irish domestic tax legislation. Thus it is often not
necessary to examine the provisions of, for example, the interest article of a particular
treaty. Provided that a treaty has been concluded, the withholding tax may be reduced to
nil under the provisions of section 246 TCA 1997.
Other International Tax Developments
Foreign Account Tax Compliance Act (FATCA)
FATCA is US tax legislation aiming at ensuring that US investors do not avoid US
taxation on their US investments by using intermediary companies located offshore. The
penalty for non compliance is a 30% US withholding tax. FATCA is likely to create huge
reporting requirements for many organisations, particularly in the financial services
space. While not “live” for another couple of years, many companies have already had
to invest heavily in preparation for its introduction.
Financial Transactions Tax (FTT)
A Financial Transactions Tax was proposed in September 2011 by the EU. A similar
plan was also unveiled in the US. Broadly, the plans seek to raise potentially huge tax
revenues by taxing, for example, stocks and bonds trade with a 0.1% levy.
Aggressive Tax Planning
There have been various reports in recent times aimed at so-called “aggressive” tax
planning. Broadly, these have challenged structures that manipulate transfer pricing or
hybrid instruments that rely on the different interpretation of financial instruments in
different locations. The ongoing economic crisis is likely to see a continuing focus on
these areas as countries struggle to maintain their tax bases.
Useful table summarising Double Tax Reliefs
Income Type
Relief
Pooling/ Carry
forward excess?
Dividends from EU/Treaty
Credit relief
Yes, subject to
conditions
Dividends from non EU/Treaty > 5%
Credit relief
shareholding
Dividends from Treaty/EU where minimum %
conditions
Credit relief
in Treaty not met but > 5%
Foreign branch income (treaty or non-treaty)
Yes, subject to
Yes, subject to
conditions
Credit relief
Yes, subject to
conditions
Interest (trading) income from 25%
Credit relief –
Pooling allowed
connected Treaty party
note need to
but no carry
apportion
forward possible
income
Interest (trading) from non Treaty party
Credit relief –
No
note need to
apportion
income
Royalties from Treaty countries
Credit relief –
No
note need to
apportion
income
Capital Gains – treaty countries
Credit relief
No