The Government published Finance Bill 2015 (“the bill”) on 22 October 2015. The bill contains the taxation measures announced in the Budget speech (13 October 2015) in addition to a number of other measures. This note provides a high level overview of the changes introduced in the bill that impact upon the financial services sector
Finance Bill 2015 – Impact on FS Sector
Changes to scope of income tax charge on income earned from assets transferred out of Ireland (s.19)
In certain circumstances, Irish income tax is chargeable on a person tax resident or ordinarily tax-resident in Ireland (“the Irish resident”) in respect of income that accrues to a person who is tax-resident or domiciled outside of Ireland (“the foreign resident”).
This charge to tax can arise where the income accrues to the foreign resident because of a transfer of assets abroad, and either (i) the transferor of the assets to the foreign resident has the power to enjoy the income, or (ii) the Irish resident receives a benefit out of the assets.
The Explanatory Memorandum confirms that this amendment has been introduced to ensure Ireland remains compliant with EU law.
The bill introduces a new exclusion from this charge with effect from 1 January 2016. The change means that the Irish resident will not be chargeable on such income where the foreign resident is tax-resident in a member state of the European Union or European Economic Area, and carries on genuine economic activities in that state.
The bill also introduces a change to these “transfer of assets abroad” provisions in relation to a person who is Irish resident but not Irish domiciled. Currently, a person who is Irish resident but not Irish domiciled is only taxable on the income of the foreign resident to the extent that the income was brought into Ireland. This is in line with the remittance basis of taxation that generally applies to persons domiciled outside of Ireland but who are resident or ordinarily resident in Ireland. The effect of the proposed change is that the “transfer of assets abroad” rules will now apply to individuals who are Irish resident but not Irish domiciled.
This change applies to income arising to the foreign resident on or after 1 January 2016.
Some concern remains in relation to EU compatibility regarding the requirement for genuine economic activities given an equivalent Irish company does not have such a requirement. In addition, the amendment that brings individuals who are Irish resident but not Irish domiciled within scope is potentially wide reaching and affected individuals should be mindful of this change when assessing their current and potential future sources of income.
Extension of deadline for making encashment tax return and related payments (s.20)
The encashment tax system requires that banks and paying agents in Ireland who collect foreign dividends belonging to others to deduct and account for income tax at the standard rate when they cash the foreign dividend for their client. Up until now, the annual return and payment date was 20 days after the end of the year of assessment. This deadline has now been extended so that encashment tax returns and related payments must be made within 46 days of the end of the year of assessment i.e. by 15 February.
This is a welcome development as it provides some extra leeway after year end for gathering the relevant information and making the correct payments.
Removal of requirement to complete Life Policy Non-Resident Declarations at inception of policy (s.21)
The bill proposes the removal of the requirement to complete a non-resident declaration at or about the time of the inception of the life policy. Provided the relevant declaration has been made prior to the chargeable event, a gain will not be treated as arising on a chargeable event in relation to a life policy.
This development will be important for non residents who were Irish tax resident when they took out the life policy.
Change to definition of “Collective Investment Undertaking” to remove uncertainty on availability of US Ireland Tax Treaty benefits (s.24)
The definition of “collective investment undertaking” is to be amended to include an Irish Collective Asset-management Vehicle (ICAV). Although this definition refers to investment funds established prior to the introduction of the gross roll-up regime for investment funds on 1 April 2000, the definition continues to have relevance to all regulated funds, including those established after 1 April 2000, in the context of the double tax treaty between Ireland and the USA.
The aim of this amendment is to remove any uncertainty or ambiguity about the application of the US Ireland double tax treaty to an ICAV.
Clarification on tax treatment of non-resident AIFs which have Irish AIFMs (s.26)
An amendment has been made to clarify the tax treatment applicable to non-resident Alternative Investment Funds (AIFs) which have an Irish tax resident AIF manager (AIFM). The purpose of the amendment is to provide that a non-resident AIF will not be viewed as having a taxable presence in Ireland solely as a result of the fund being managed by an authorised independent Irish tax resident AIFM.
This is an important measure to ensure unexpected tax costs do not make Ireland an unattractive location to manage non-Irish AIFs.
There was some uncertainty on this issue so it is helpful that the position has been clarified, especially given the importance of the fund management industry to the Irish FS sector.
Confirmation of tax treatment of Additional Tier1 instruments (s.27)
Recently, Irish financial institutions have been taking steps to address shortfalls in their balance sheets in order to ensure they meet their Tier1 capital requirements.
Additional Tier1 (AT1) instruments are an important element of Tier1 Capital Requirements. However, as they share features of both debt and equity, there has been some uncertainty in relation to their tax treatment. The bill confirms that an AT1 instrument will be regarded as a debt instrument and that the coupon payable will be regarded as interest and not as a distribution or a charge on income for tax purposes. The bill further provides that, with any necessary modifications, the exemption from interest withholding tax applicable to quoted Eurobonds will apply to AT1 instruments.
This is a welcome change and brings the Irish tax treatment of these instruments in line with other EU jurisdictions.
Introduction of the Knowledge Development Box regime (s.30)
The bill provides for the introduction of the Knowledge Development Box (KDB) that was flagged in the 2014 Budget speech. The KDB is aimed at incentivising innovative activities by offering an effective tax rate of 6.25% on qualifying profits. The KDB will be the first OECD compliant preferential tax regime in the world, and the bill confirms that the regime is following the “modified nexus approach” endorsed by the OECD. The relief is given by way of a deduction of profits equal to 50% of the qualifying profit from this separate trade to give an effective tax rate of 6.25%. The bill confirms that certain patented inventions and copyrighted software, in addition to other assets, will be considered intellectual property for the purposes of the qualifying asset definition. The relief will be available to companies for accounting periods which commence on or after 1 January 2016 and before 1 January 2021.
The introduction of this measure would traditionally be seen as something that would be relevant only for tech, industrial or pharmaceutical industries. However, there is a significant amount of R&D being carried on by a broad range of companies right across the FS spectrum. We recommend that any company engaged in R&D activity should keep abreast of how this measure is implemented in practice so that any proportion of profits that could potentially fall within scope are identified at an early stage.
Proposal to introduce County by Country Reporting Legislation in line with OECD Model Legislation (s.31)
The bill includes proposals to introduce legislation on County by Country Reporting that closely mirrors the OECD’s suggested model legislation. Country by Country Reporting essentially requires multinational groups (that are within scope) to report place of incorporation, tax residency, revenues, profits, taxes paid, capital, number of employees, and details of business activities by entity on a country by country basis.
For years commencing on or after 1 January 2016, multinational groups, where the ultimate parent entity is tax resident in Ireland, will have to file an annual County by Country Reporting report with the Revenue Commissioners if the group’s consolidated turnover exceeds €750 million. These multinational groups will be required to submit their County by Country Reporting reports to their “home jurisdiction” no later than 12 months after the end of the relevant fiscal year.
It is proposed that the Revenue Commissioners will be authorised to share these reports with competent authorities in another jurisdictions if the reports covers that jurisdiction and Ireland has entered into an agreement to exchange information with that same jurisdiction provided that jurisdiction has in place certain provisions to protect confidentiality, consistency and appropriate use of the reports.
As the regime is to take effect from 1 January 2016, groups that fall within scope should begin to take steps to prepare for its introduction.
Capital Gains Tax (CGT) deferrals on transfer of assets to an ICAV (S.37)
There is normally a deferral of CGT when assets are transferred between companies in the course of a reconstruction or amalgamation, or between two group companies. Since 2008, this treatment has not been available where the assets are transferred to an investment company which is subject to “gross roll-up” Irish tax treatment. A new form of “gross roll-up” fund vehicle, the ICAV, was introduced into Irish law in 2015. The bill proposes changes to the CGT deferral rules to prevent the deferral of CGT on the transfer of assets to an ICAV in the course of a reconstruction or amalgamation, or from a group company..
This change has been introduced to bring the tax treatment on the transfer of assets to an ICAV in line with the tax treatment applying to transfers to other types of funds.
Changes to Stamp Duty Charges on ATM / debit cards (s.61)
The bill makes provision for the introduction of a new basis for levying stamp duty on ATM/debit cards. Stamp duty is currently levied based on a fixed annual charge of €2.50 for an ATM card or a debit card and €5 for a combined ATM/debit card. Under the new rules, the fixed annual charge will be abolished and, instead, stamp duty of €0.12 will be levied on each ATM withdrawal (but not on debit or credit transactions). The annual stamp duty charge in respect of each card will be capped at the existing levels of €2.50 and €5, as appropriate. These changes will apply from 2016 onwards.
The change has been introduced to incentivise customers to use debit cards instead of withdrawing cash.
Extension of Revenue Powers (S.71)
The bill includes a series of amendments to Revenue powers. Regarding the financial services sector, the bill provides the Revenue Commissioners with additional powers to seek records and documents from financial institutions. The relevant changes are set out below:
- The Revenue Commissioners can currently seek information from a financial institution about a known taxpayer. The bill amends this to include a taxpayer whose identity is not known at that time, but who is capable of being identified by other means.
- The current provision enabling the Revenue Commissioners to seek a High Court order requiring a financial institution to provide information about a taxpayer is amended to allow them to request the court to direct that the existence of the disclosure order is not made known to the taxpayer. Where such a request is made to the court, the Revenue Commissioners must have reasonable grounds for suspecting that the disclosure of the order would lead to serious prejudice to the proper assessment or collection of the tax.
- The Revenue Commissioners’ power to obtain taxpayer information from various sources where foreign tax is at issue is amended. The power to apply to the Appeal Commissioners for their consent to seek taxpayer information from a third party (where that third-party name was provided by a financial institution) is now extended to cover foreign tax.
The extension of Revenue Powers is significant. We recommend that financial institutions familiarise themselves with the new rules so that they are fully aware of their obligations when dealing with future requests from the Revenue Commissioners.
Update to definition of “Financial Institution” as part of Central Bank (Supervision and Enforcement) Act 2013 (s.82)
The Central Bank (Supervision and Enforcement) Act 2013 amended the Central Bank’s powers to authorise branches of credit institutions headquartered outside the European Economic Area. This has necessitated the inclusion of a technical change in the bill to update the existing “financial institution” definition (to include credit institutions in the EEA which hold a similar authorisation or licence to a section 9 licence) that is used in a wide range of tax provisions.
Abolition of the Pension Fund Levy
The abolition of the pension fund levy that was announced in the Budget does not require any legislative amendment as it simply will not be extended.
Extension of the Bank Levy to 2021
The Budget indicated that the bank levy on financial institutions which was due to expire in 2016 will be extended to 2021. The Minister stated in the Budget that this measure is expected to raise €750 million. The method used to calculate the levy, which is currently based on the DIRT payments made by the financial institutions in 2011, will be subject to review.
The bill does not contain any additional detail on the new methodology that will be used to collect this levy. Given that details have yet to be finalised, it will be important for financial institutions to engage in any consultation process to ensure their views / concerns in relation to particular models / approaches are raised.