Earlier this month the Minister for Finance and Public Expenditure and Reform, Paschal Donohoe (the “Minister”), delivered his Budget 2020 speech. This week, the Minister published Finance Bill 2019 (the “Bill”) which provides a legislative basis for provisions that were announced in Budget 2020, as well as a number of new measures. The Bill also makes a number of amendments to ensure that the status quo is maintained in relation to certain tax measures in the event of a disorderly exit of the UK from the EU.
Set out below is a brief overview of the additional information provided by the Bill, as well as the new measures announced in the Bill.
The Bill amends the Taxes Consolidation Act 1997 (the “TCA”) to provide tax relief for pension contributions made by a company to occupational pensions schemes set up for employees of another company in certain defined circumstances.
R&D Tax Credit
The Bill legislates for changes to the R&D tax credit regime, as outlined in the Minister’s Budget 2020 speech. The changes include a number of supports to small and micro sized enterprises (i.e. companies that employ fewer than 50 people and have an annual turnover and/or balance sheet not exceeding € 10 million), including:
- an increased tax credit of 30%;
- an enhanced method of calculation of the payable tax credit based on twice the current year payroll liability; and
- an ability to offset of the R&D tax credit for pre-trading expenditure against their PAYE, USC and VAT liabilities for the same period.
Note, the amendments outlined above are subject to a commencement order by the Minister pending state aid approval from the European Commission. The Bill includes a number of other amendments that apply to the operation of the R&D tax credit more generally, including:
- the allowable limit for outsourcing of R&D activities to universities and higher education institutes increased from 5% to 15% of the R&D expenditure;
- grants from the State or the EU will be deducted from qualifying R&D expenditure;
- a company which outsources to third parties must now notify in advance of, or on the day of, payment, if that company intends to make a claim for the R&D tax credit; and
where a payable amount or amount surrendered to a key employee is later withdrawn, any offset of losses or credits cannot be used to shelter the clawback of such an amount.
Employment Investment Incentive (the “EII”)
The Bill legislatives for a number of amendments in respect of the EII. Most of these amendments were announced in Budget 2020, however a number of technical amendments were also made. As outlined in Budget 2020, full income tax relief will be available in the year of investment for shares issued after 8 October 2019. In addition, from 1 January 2020 the maximum annual investment qualifying for relief for investors will increase to €500,000 where the investor holds the investment for ten years and to €250,000 where the investor holds the investment for four years. The Bill also makes a number of technical amendments to the EII, including:
- obliging managers of a designated fund to return details of holdings of eligible shares, through the electronic means that Irish Revenue make available, within 30 days of receiving the statement of qualification from a qualifying company;
- removing the choice year of assessment that the deduction can be claimed for investors that subscribe for shares via a designated fund;
- clarifying the position that if a company buys back, redeems or repays any shareholders for shares in the company using EII investments within the compliance period, then there will be a reduction in the relief granted to all EII investors as a result; and
applying penalties if there is a failure to notify Irish Revenue of an event that will result in relief being withdrawn.
The Bill includes a number of changes to Irelands transfer pricing rules in line with those previously published in a feedback statement. The updated transfer pricing rules will apply for the chargeable period commencing on or after 1 January 2020 and are summarised below:
- Irish transfer pricing rules will be extended to certain cross border non-trading transactions;
- transactions agreed before 1 July 2010, will come within the ambit of the Irish transfer pricing rules, whereas previously these were out of scope;
- enhanced transfer pricing documentation requirements will apply for large tax payer groups, with a master file revenue threshold of €250 million and a local file revenue threshold of €50 million.
- transfer pricing rules will apply to capital transactions where the market value of the asset exceeds €25 million; and
- a higher rate of penalty will apply for larger taxpayers who fail to comply with a request from Irish Revenue to provide transfer pricing documentation.
Subject to the making of an order by the Minister, Irish transfer pricing rules will be extended to SMEs in the future. However, no formal documentation requirements will apply to small enterprises and simplified documentation requirement apply to medium enterprises in certain circumstances.
The Bill introduces anti-hybrid rules as required by the EU’s Anti-Tax Avoidance Directives (“ATAD”). The purpose of the anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of a financial instrument or an entity under the tax laws of two or more jurisdictions to generate a tax advantage. The new rules apply to arrangements between associated enterprises (which is based on the percentage of the shares, voting rights or rights to profits in that other entity) and to “structured arrangements” which is where a mismatch outcome is priced into the terms of an arrangement or an arrangement designed to produce a mismatch outcome. Under the new rules, a double deduction mismatch outcome arises where two countries give a tax deduction for the same payment but only one country taxes the associated receipt. A deduction without inclusion mismatch outcome arises where one country gives a reduction for a payment but no country taxes the associated receipt. A withholding tax mismatch outcome arises where the transfer of a financial instrument is designed to produce relief for withholding tax to more than one of the parties involved in the transaction. The “primary rule” included in the Bill is that where the benefit of the mismatch outcome arises in Ireland a deduction is not allowed. A “defensive rule” may apply in certain circumstances by either denying a deduction or including the relevant payment as taxable income of the entity. The rules will apply to all corporate taxpayers, there is no de minimus threshold. The legislation applies to payments made on or after 1 January 2020.
The Bill includes technical amendments to the exit tax provisions including preventing the situation where the exit charge could unintentionally be circumvented and to bring the provision fully in line with the EU’s ATAD.
Mandatory disclosure of cross-border arrangements
The Bill introduces a mandatory disclosure regime, known as DAC6, for certain cross-border transactions that could potentially be used for aggressive tax planning. The new provisions introduce requirements for “intermediaries”, and taxpayers in certain circumstances, to make a return to the Irish Revenue of information regarding cross-border arrangements with characteristics referred to as “hallmarks”. The rules come into operation on 1 July 2020 and intermediaries or tax payers will be required to file information within 30 days of one of the events specified in the legislation occurring. Where the first step of a reportable cross-border arrangement occurred during the period beginning on 25 June 2018 and ending on 30 June 2020, the arrangement should be reported no later than 31 August 2020.
The Bill legislates for a number of changes that would affect property transactions, including changes to the Real Estate Investment Trusts (“REITS”) regime and Irish Real Estate Funds (“IREFs”). The changes to the REIT regime rules include;
- dividend withholding tax (“DWT”) will now apply on the distribution of proceeds from a sale of rental property by a REIT;
- where the company ceases to be a REIT or a group REIT, a deemed disposal and re-acquisition of REIT assets will occur only where the REIT has been a qualifying REIT for 15 years or more;
- only expenses incurred wholly and exclusively for the purpose of the REIT business are deductible when calculating profits for distribution and that any excessive amounts are subject to tax in the hands of the REIT; and
- the REIT must either reinvest the proceeds of a property disposal in the REIT property business or distribute the proceeds within a 24 month period. Any amounts not reinvested or distributed will be treated as part of the REIT’s property income, 85% of which must be distributed annually.
The changes announced to the taxation of IREFs were also incorporated in the Bill, including a number of anti-avoidance such as restrictions on the deductions that can be made by an IREF in arriving at the surplus available for distribution. These restrictions are implemented by way of an interest restriction and a general restriction.
Some new VAT measures have been introduced in the Bill, including:
- powers of investigation and removal of records contained in the VAT Consolidation Act 2010 can be used on foot of requests from other EU member states; and
- the reduced rate of 13.5% VAT will now apply to food supplements for oral consumption from 1 January 2020.
Some new measures were also introduced in the Bill, including:
- amending the general rule on deductions to include a new paragraph that specifies that taxes on income are not deductible in calculating profits/gains chargeable to tax under Case I or II of Schedule D income. The Department of Finance has indicated that this amendment is intended to give legislative basis to the long-standing position of Irish Revenue.
- amendments to the tax appeal procedure such that the Appeals Commissioners (“AC”) is now required to notify parties of the details of case management conferences and may dismiss an appeal where a party fails to attend such a conference when directed to. Separately, on the application of both parties to appeal, the AC will be required to stay proceedings in order to allow a mutual agreement procedure (“MAP”) in relation to a dispute about double taxation to proceed.