The Irish Minister for Finance delivered his Budget 2016 (the "Budget") speech this week.
As the fastest growing economy in Europe, the Minister, as expected, delivered a package of measures designed to improve the tax position for individuals based in Ireland. These measures were welcome, but modest, and businesses with staff in Ireland will hope this trend continues.
Significantly, the Budget announced the introduction of a 'knowledge development box' or KDB, with a reduced rate of tax of 6.25% for qualifying income. It is described as the first OECD compliant KDB in the world and, together with the 12.5% standard rate, research and development ("R&D") tax credit and depreciation allowances for intangibles, provides a hugely competitive offering to international business who are 'on-shoring' their IP in light of international tax developments.
It was also announced that NAMA is aiming to deliver 20,000 residential units before the end of 2020 by working with developers. This will require funding in the order of €4.5bn. Clearly, this will create major opportunities for domestic and international property firms, banks and financiers.
The Minister also updated Ireland's International Tax Strategy with the publication of a report detailing Ireland's 'best in class' approach to the OECD Base Erosion and Profit Shifting (''BEPS'') project and the new EU Commission Action Plan on Corporate Taxation. The report highlights that the Irish corporation tax system is transparent and statute based, and as such, provides certainty to business. It reaffirms that the OECD BEPS reports do not affect Ireland's 12.5% corporation tax rate and outlines measures that Ireland has taken in light of these developments. In particular, Ireland will legislate in the Finance Bill 2016 (to be published on 21 October 2015) for 'country by country' reporting in accordance with the OECD standard.
We believe that our clients, who include multinationals, banks and international investment firms who invest in and through Ireland, will welcome the fact that Ireland is taking the initiative and positioning its tax and economic policies to compete in this new international tax environment.
Taxation of Individuals
There were some welcome reductions in the taxation rates of individuals.
(a) Income tax
There was a reduction in the three lower rates of the Universal Social Charge ("USC") in addition to an increase in the USC thresholds. The third rate of USC, which will apply to income from €18,669 to €70,044, is reduced from 7% to 5.5%. The change will, for the first time in a number of years, reduce the marginal tax rate to below 50% for middle income earners. Higher earners (above €70,044) will benefit from the rate reduction on that portion of their income within the relevant band. There are no changes to the rates at the upper levels, which remain at 8% and 11% for income above €100,000 for PAYE and non-PAYE workers, respectively.
The non-PAYE worker, who traditionally has been disadvantaged due to the absence of a PAYE tax credit, will be given an additional credit of €550. This is a response to points raised during a recent public consultation.
(b) Capital gains tax
The headline capital gains tax (''CGT'') measure is the introduction of a specific 20% rate applying to entrepreneurs disposing of a business from 1 January 2016. This is subject to an overall limit of €1m.
It is difficult to define the scope of this exemption, however the consultation document released in the Budget suggests the relief will be available to owners/founders of private unquoted companies, as well as owners of unincorporated businesses, which they have owned for at least three years. It will not be available to companies in respect of business asset disposals by such entities. This replicates some of the more restrictive provisions of the current entrepreneur relief.
Those currently involved in selling a business may consider delaying their date of disposal to benefit from this exemption and avoid binding contracts to sell before the year end.
(c) Employment and investment incentive
The Employment and Investment Incentive (''EII'') changes announced in Budget 2015, which were subject to compliance with European State Aid provisions, took effect from midnight on 13 October 2015 and mean that the amount which a qualifying company can raise under EII is increased to €5m annually (up from €2.5m) subject to a maximum lifetime limit of €15m (up from €10m). EII will now also allow for investments in expansion works on nursing homes and all eligible small and medium-sized enterprises can qualify regardless of their geographic location.
(d) Pension fund levy
The current 0.15% annual pension fund levy will terminate in 2015 and will not be renewed. There were no changes to the pension contribution thresholds or ceilings.
Irish Real Estate
As noted above, NAMA aims to deliver 20,000 residential units before the end of 2020 by working with developers. This will require funding of €4.5bn and will create major opportunities for domestic and international property firms, banks and financiers.
However, despite many calls for tax incentives to promote residential property construction, there was very little in the Budget. Such measures were generally small scale and mainly of relevance to voters, rather than commercial property investors.
(a) Local property tax
Local property tax ("LPT") is an annual tax charged on residential property in Ireland, which is based on the market value of the property on 1 May 2013. The 1 May 2013 valuation applied until 31 October 2016.The Minister has proposed postponing the pending revaluation date 2019. This gives a small annual benefit for homeowners, as increased Irish property values, since 2013 should not result in increased LPT charges. REITs, QIAIFs and large scale residential property owners will also benefit from this across their portfolios.
The other recommendations in the recent Thornhill Report on LPT are being considered and they include scrapping certain LPT exemptions for unsold houses by developers.
(b) Home renovation incentive
The home renovation incentive ("HRI") is being extended again to 31 December 2016. The HRI has been a popular measure which provides an income tax credit for homeowners on qualifying expenditure renovating and improving their principal private residence as well as residential landlords.
(c) Other rates
There were no other announced changes to the rates of tax on property income, or changes to the computation of such income. The restrictions on deductions for residential borrowing remain in place.
There were no major VAT announcements and there will be no change in the existing VAT rates. The 9% rate for the tourism sector has been retained. There was speculation that a similar reduced rate might be introduced for the construction sector, but no such change was signalled. The 13.5% rate of VAT on newly built property remains.
A relief from corporation tax for certain start-up companies in their first three years of trading was introduced in 2009. This applies where a company's annual corporation tax liability on qualifying income and gains in the first three years of trading does not exceed €40,000. Marginal relief may be available in circumstances where there is a tax liability of up to €60,000. Relief is capped at the amount of employer's PRSI paid in the period. This relief is to be extended for a further three years until the end of 2018.
The Budget was light on measures impacting the financial services sector and so we await the more detailed Finance Bill. There were no changes announced impacting the investment fund or securitisation sectors.
The Minister announced that the existing bank levy, which is calculated on the basis of Deposit Interest Retention Tax (''DIRT'') will be extended to 2021. The levy was originally introduced in 2014 to collect a contribution from the banking sector to aid towards economic recovery and was due to expire in 2016. The methodology used to calculate the levy will be reviewed, which may mean an alternative basis of calculation may be introduced. In the context of ongoing discussions about standard variable rates charged by Irish banks for mortgage lending, it will be interesting to see whether the Government employs this as a basis for calculating the revised levy.
Knowledge Development Box
The Minister announced the introduction of the KDB, which is designed to encourage the development of IP in Ireland. A corporation tax rate of 6.25% will apply to income qualifying for relief.
The KDB will be the first OECD compliant 'patent box' system introduced. The KDB regime will be in line with 'modified nexus' principles endorsed by the OECD. Under the modified nexus principles, tax benefits are limited to IP-related income, to the extent it was generated by qualifying expenditure. This seeks to link qualifying expenditure with the proportion of R&D expenditure carried on by the company in Ireland. Under this approach, only the expenditure incurred developing the IP asset after it was acquired should qualify as ''qualifying expenditure''. The KDB will apply to patents and copyrighted software.
The KDB complements the existing 12.5% corporation tax rate, R&D tax credits and the IP amortisation or depreciation regime in Ireland and, as stated, the package of measures will help international businesses who are 'on-shoring' their IP in Ireland in response to BEPS and other international tax initiatives.
The Budget includes an update on Ireland's International Tax Strategy (the "Update"). This explains Ireland's progress toward goals set out in Budgets 2014 and 2015 and includes a statement on Ireland's compliance with the OECD BEPS project.
The final package of OECD BEPS proposals published on 5 October 2015 aim for a coordinated reform of international tax rules to prevent corporate profits from being artificially shifted to low/no tax environments, where little or no economic activity takes place. While BEPS presents challenges, there are also opportunities for countries like Ireland, where the alignment of tax and substance has been a long standing feature of its international tax policy.
Nothing in the BEPS package is legally binding and changes in domestic tax law and international tax treaties are required to implement the proposals. The Update states that, "…Ireland has committed to the BEPS process and will play its full part in implementation…" In concrete terms, this includes the following:
- Ireland will legislate in the Finance Bill for country-by-country reporting in accordance with the OECD standard. Many other OECD countries are taking this early step.
- Ireland will introduce a KDB in accordance with the OECD ''modified nexus'' model, the first and only OECD-compliant box in the world.
- Ireland will continue its close engagement at OECD level on the 'multilateral instrument'. This is the preferred means by which changes will be made in a synchronised fashion to tax treaties to deliver several BEPS actions, including agreed standards on treaty shopping and dispute resolution, as well as best practice recommendations on permanent establishment rules.
- Ireland will update references in domestic transfer pricing legislation to revised OECD Transfer Pricing Guidelines.
- Ireland will continue to engage constructively with international developments on controlled foreign company rules, interest deductibility, and hybrid mismatches. These areas are not minimum standards requiring early or immediate action.
The Update also outlines the Government's position on the EU agenda on tax policy matters. While it supports initiatives on transparency and automatic exchange of information, it does not support harmonisation of tax rates or minimum tax thresholds.
Ireland as an International Ship Finance Centre
An independent review of marine taxation was published with the Budget. It includes recommendations to assist the marine sector in general; such as improved capital allowances on ports and docks, and incentives for investment in fishing and seafood processing. Of particular interest are the measures aimed at promoting Ireland as an international shipping and ship finance centre, including:
- the introduction of enhanced trust certificates as a form of asset backed security;
- improvements to Ireland's tonnage tax regime; and,
- an extension of a VAT rebate scheme for commercial ships registered in the EU.
It is suggested that more ambition will be required to compete with traditional ship finance centres or to emulate Ireland's status as a global hub for aircraft finance and leasing.
In Budget 2013, legislation was put forward for a scheme of accelerated capital allowances on the construction of facilities used in the maintenance, repair, overhaul and dismantling of aircraft. However, the legislation was not implemented pending European State Aid approval. This has now been granted, subject to conditions. The modified scheme provides that expenditure on aviation facilities will, in general, qualify for industrial buildings allowances of 4% per annum over a 25 year period. However, up to €5m of ''specified capital expenditure'' will qualify for accelerated allowances of 15% per annum over seven years.