Minister for Finance Brian Lenihan with the Budget 2010 presentation on Dec 09, 2009

The Minister for Finance Brian Lenihan T.D. today published the Finance Bill 2010 which gives effect to the taxation measures announced in last December’s Budget. It includes provisions to increase the attractiveness of Ireland as a location for investment and provisions for the introduction of transfer pricing legislation to regulate arm’s length trading between associated companies, in line with international standards. The Life Insurance Levy, introduced in Finance Act 2009, is being removed from pension products in order not to discourage investment in pensions and the existing R&D tax credit is being amended to cover situations where a company carries-out R&D activities in different facilities in separate geographical locations and the activities in one of those facilities is permanently discontinued. In response to a European Court of Justice (ECJ) ruling against Ireland of 16 July 2009, the VAT regime will be extended to cover Public Bodies, including local authorities, engaging in activities (e.g. include services such as waste collection, landfill, and recycling services; off-street parking; toll roads; the operation of leisure facilities) that lead to a distortion of competition with private operators.

The Bill also includes provision for enactment of the levy of €200,000 annual levy on wealthy tax exiles.

The Minister said today: “This Bill strikes a balance between providing targeted support to enterprise to assist in our economic recovery and enhancing the ability of the Revenue Commissioners to carry out their work.  It also ensures that all sectors play their part in stabilising the public finances and thereby restoring domestic and international confidence in our economy. In the last Budget, the Government chose to reduce expenditure rather than increase taxes, on the basis that tackling the cost of running the State is the most effective strategy for returning the economy to growth.

By addressing our cost base in the successive Budgets over the past 18 months, we have improved our competitive position and gained market share.

 The pro-enterprise taxation measures in this Bill will build on our existing strengths and will put us in the position to take advantage of the recovery that my Department and the Central Bank are forecasting for the end of this year.

These measures, together with our budgetary strategy, will create and protect jobs by supporting export led growth in services and goods.”

The Bill, which must be enacted by 9^th April, gives effect to the following 1) measures announced on Budget Day:

Introduction of a Carbon Tax at a rate of €15 per tonne is being introduced on fossil fuels. This applied to petrol and auto-diesel with effect from midnight, 9 December 2009; and will apply from 1 May 2010 to kerosene, marked gas oil, liquid petroleum gas (LPG), fuel oil and natural gas.  The application of the tax to coal and commercial peat is subject to a Commencement Order.

Provision of measures to cover a Car Scrappage Scheme from 1 January to 31 December 2010; expansion of the existing VRT exemption for Electric Vehicles until 31 December 2012; and expansion of the existing VRT relief scheme (up to €2,500) for Plug-in Hybrid Electric Vehicles until 31 December 2012.

Reduction in standard rate of VAT from 21.5 per cent to 21 per cent which came into effect from 1 January 2010; this reduction applies to all goods and services which had been subject to VAT at 21.5 per cent.

Decrease in the Excise Duty on Beer and Cider by 12 cent (VAT inclusive) per pint, on Spirits by 14 cent (VAT inclusive) per half glass, and on Wine by 60 cent (VAT inclusive) per 75cl bottle with effect from midnight on 9 December 2009.

Extension of Mortgage Interest Relief for qualifying loans whose entitlement to mortgage interest relief ends in 2010 or after to continue to qualify for relief at the applicable rate up to end 2017.  Qualifying loans taken out before 31 December 2011 will continue to get relief at current rates until end 2017. Transitional measures are provided for qualifying loans taken out after December 2011 and end-2012 where relief will be provided at reduced rates and duration.  Mortgage interest relief will be abolished entirely for the tax year 2018 and subsequent years.

Introduction of a Domicile Levy of €200,000 on all Irish-domiciled individuals who are Irish citizens to ensure that wealthy Irish domiciled individuals make a contribution to the State during these times of economic and fiscal difficulty.  The Levy will apply to wealthy Irish-domiciled individuals with Irish located capital greater than €5 million, worldwide income in excess of €1 million and an Irish income tax liability less than €200,000.  Persons liable to the Levy will have to pay it regardless of where they live or where they are tax resident. 

Increase in the effective income tax rate paid by those subject to the restriction of reliefs or horizontal measure.  Taxpayers availing of specified reliefs will now become subject to the restriction at an adjusted income level of €125,000 (down from €250,000) and where adjusted income reaches €400,000 (down from €500,000), taxpayers will now be subject to the full restriction and pay an effective income tax rate of 30% (up from 20%).  In order to achieve the new effective income tax rate, it has been necessary to implement a specified relief threshold of €80,000 (down from €250,000).

Extension of the existing scheme of tax exemption on the income and gains of new start-up companies over the first 3 years of operation is being extended to companies who commence to trade in 2010.

Expansion of the scope of the existing scheme of capital allowances for energy-efficient equipment is being extended to cover an additional 3 categories of technology (refrigeration and cooling systems, electro-mechanical systems and catering and hospitality equipment), bringing the total number of categories to 10.

Introduction of a statutory scheme providing for voluntary deductions from members of the Judiciary to cover pension-related deductions (i.e. the so-called ‘Pension Levy’).

Facilitation of the introduction of a National Solidarity Bond which constitutes a medium-term national savings product to be marketed by the NTMA at small investors over the next few months.  Unlike some other NTMA long-term savings products such as Savings Certificates, the Bond will pay interest on a periodic basis over its lifetime in addition to interest at the end of its lifetime.

The Minister highlighted a number of the 2) other new measures in the Finance Bill:

Provision of measures to facilitate the attraction of Ireland for the development of Islamic finance which covers any financing arrangement that is compliant with the principles of Shari’a law.  The tax treatment applicable to conventional finance transactions will be extended to embrace Islamic finance.

Introduction of a package of reforms relating to Capital Acquisitions Tax to modernise and simplify the CAT regime, while delivering immediate and significant benefits to taxpayers, their legal advisers and the Revenue Commissioners. 

As a response to a European Court of Justice (ECJ) ruling against Ireland of 16 July 2009, the VAT regime will be extended to cover Public Bodies, including local authorities, engaging in activities (e.g. include services such as waste collection, landfill, and recycling services; off-street parking; toll roads; the operation of leisure facilities) that lead to a distortion of competition with private operators.  Such services are already subject to VAT where provided by a private operator and the VAT (either standard or reduced) rates will apply as appropriate. The changes will apply from 1 July 2010. Education, health, water and passenger transport services willnotbecome subject to VAT arising from the Judgment as they are otherwise exempted from VAT.

Provisions relating to the approval of institutions for the purposes of health expenses relief are being amended so as to remove the requirement that such institutions must be approved before tax relief on expenses incurred in such institutions can be allowed. These institutions are mainly nursing homes (located in Ireland and abroad) and foreign based hospitals. The relief is being refocused on expenses incurred by or on the advice of a medical practitioner.

The Life Insurance Levy, introduced in Finance Act 2009, is being removed from pension products in order not to discourage investment in pensions.

Changes to the penalties applicable to certain offences under excise and customs law. The key feature of the proposed changes is that they will increase substantially the fines which a Court may impose on persons convicted of such offences on indictment. These measures should assist in discouraging smuggling.

The existing R&D tax credit is being amended to cover situations where a company carries-out R&D activities in different facilities in separate geographical locations and the activities in one of those facilities is permanently discontinued. 

Enhancement of the existing tax treatment of dividends received by companies here to increase the attraction of Ireland for economic activity. The amendments involve (i) charging tax at 12.5% (instead of 25%) on foreign dividends paid out of trading profits from countries with whom Ireland does not have a tax treaty; (ii) simplifying the arrangements under which foreign dividends are treated as sourced from trading or non-trading profits; (iii) providing tax exemption to foreign dividends forming trading income from portfolio investments (holdings of less than 5%, primarily insurance companies);

Extension of unilateral credit relief in respect of withholding taxes on royalty income from non-treaty countries to all trading companies.  Companies currently entitled to manufacturing relief are also entitled to unilateral credit relief in respect of withholding taxes on royalty income from non-treaty countries but this ends on 31 December 2010 as part of the ending of the 10% Corporate Tax Manufacturing regime. 

Enhancement of the capital allowance scheme for Intangible Assets which was introduced in Finance Act 2009 to improve its effectiveness.

Provisions for the introduction of transfer pricing legislation to regulate arm’s length trading between associated companies.  Ireland’s existing, but limited, arm’s length pricing rules for manufacturing trading will cease at the end of this year with the ending of manufacturing relief.  The opportunity is being taken to introduce general transfer pricing legislation which will align Ireland’s tax code in this area with the international norm.

The Remittance Scheme introduced in Finance (No.2) Act 2008 is being enhanced to improve Ireland’s ability to attract highly skilled, value-added, individuals capable of acting as ‘magnets’ to attract economic activity.  The scheme will now cover both EU and EEA nationals while the condition that persons covered by the scheme must remain in Ireland for a minimum of 3 years is reduced to 1 year.

A package of measures is being introduced to improve the attractiveness of Ireland as a base for internationally-traded services, particularly finance services.  These include:exemption from completion of non-resident declarations for foreign investors in Irish domiciled funds that are not marketed within Ireland; provide clarity with regard to the tax treatment that would apply to foreign funds that are managed from Ireland under the recently adopted UCITS IV (Undertakings for Collective Investments in Transferable Securities) Directive provides for the establishment and operation of a UCITS ‘Management Company Passport; extension ofstamp duty to accommodate mergers of investment undertakings.

Measures are being introduced across the various tax codes to ensure that Exchequer receipts are not eroded by the use of tax avoidance schemes. 

Provisions are being introduced to abolish a number of tax expenditures in line with the recommendations of the Report of the Commission on Taxation.  These include:

Relief available to ‘passive’ investors under the Significant Buildings and Gardens Scheme. 

Gifts of property to the State. 

BIK exemption of employer-provided art objects. 

Tax relief on service charges.  This will come into effect in 2012 and will mean that charges paid in 2010 can be claimed against tax in 2011. 

Capital Allowances for childcare facilities. 

Relief for long-term care policies. 

A package of measures across a number of tax areas is being introduced to enhance the ability of the Revenue Commissioners to carry out their mandate.

The Windfall Tax, introduced as part of the NAMA legislation, is being extended to include material contraventions and provision is also being made to ensure that the tax does not cover the sale of one-off sites below an acre and €250,000.

A revised classification system for the registration of vehicles is being introduced from 1 January 2011.  The new system will reflect the categories used for vehicle classification at European level under a number of Directives.

The Bill 2010 provides for the ratification of a further six Double Taxation Treaties (DTAs) between Ireland and: Bahrain, Belarus, Bosnia and Herzegovina, Georgia, Moldova and Serbia. Ireland has a rapidly expanding network of 56 DTAs signed with a pipeline of a further 11 Treaties close to being finalised.

Finance Bill 2010

Explanatory Memo Finance Bill 2010

List of Finance Bill Items

The changes to transfer were Inevitable according to Noel Cunningham, tax partner with Mazars: “Ireland was very much swimming against the tide on this one”, he said. “It is increasingly difficult for a developed EU member State to defend a low corporate tax policy without a transfer pricing regime in place. We can no longer keep our heads down on this. Transfer pricing is the hot topic in international tax at the moment. It had also become more relevant on the Irish tax landscape given the intense pressure on fiscal authorities worldwide to protect their tax revenues. The new rules should give us more respectability and less embarrassment when promoting our favourable 12.5% tax regime”.

“It should also serve as a wake- up call to ensure the adequacy of transfer pricing documentation when foreign Revenue Authorities query the amount of profits booked in Ireland relative to other locations. Formal documentation will now be a legal requirement. While applying only to large companies, a marker has now been set down and it will be interesting to see what approach Revenue will adopt in their guidance notes on this issue. They need look no further than to their UK HMRC colleagues for inspiration!”, he said.

Joan O’Connor, Head of Transfer Pricing, Deloitte commented: “One of the fallouts from the economic crisis is the more complex and prescriptive world-wide regulatory environment. The effectiveness of the larger nations in driving the tax agenda was demonstrated through the efforts of the G20 in increasing the level of exchange of tax information and the focus on tax transparency. The introduction of a formal new transfer regime is not unexpected in the context of a renewed focus on regulation and indeed the move by tax exchequers worldwide to further protect their own tax bases. Given the scope of the law and the focus on regulation globally, the introduction of this law should be neutral as regards Ireland’s attractiveness as a location for investment.

“Large multinational companies and their advisors already deal with transfer pricing issues on a day to day basis with foreign taxation authorities and therefore Ireland’s new law should not be a significant additional burden to them.

“It is vital that Ireland remains high on the agenda when companies decide where to locate. One of the benefits of the new law is that companies may perceive that Irish Revenue is more readily available to assist them in defending their pricing policies when in discussion with overseas tax authorities on adjustments.”

Pat Wall, Chairman of the American Chamber Taxation Group said; “The introduction of detailed transfer pricing rules from 2011 is to be welcomed as it further increases the transparency of Ireland’s competitive tax legislation. US multi-nationals with operations in Ireland are already working within the very strict transfer pricing rules laid down by the IRS. The new rules which fully comply with OECD guidelines will help Multinationals support the profits taxed in Ireland at the 12.5% corporate tax rate”.

Wall said “We welcome the expansion of reliefs available to non-domiciled individuals but we believe more needs to be done.This is not about tax breaks for the rich. It is about competing for internationally mobile talent. We need our most talented people now more than ever and we must recognize that taxation plays an ever more important role in where mobile and highly skilled employees chose to live and work. A senior executive with a family is more highly taxed in Ireland than in any other OECD country bar Sweden. That includes UK, US, France and Germany.

“It should also be recognized that the more senior the executive based in Ireland the greater their power to influence investment decisions within the global corporation; investment which would help retain existing jobs and create new jobs in the multinational sector”.

On the proposed Carbon Tax he expressed concern about the impact on Ireland’s already high cost of energy. “We urge the Minister to defer implementation to allow a proper assessment of the impact of the tax on energy costs”

Financial Services Ireland (FSI), the IBEC group that represents the IFSC, today welcomed measures in the Finance Bill that support the financial services sector, in particular the extension of the remittance tax scheme to EU and EEA nationals. The remittance scheme is a tax incentive encouraging highly skilled foreign staff to locate in Ireland.

FSI Director Brendan Kelly said: “It is clear that the blanket abolition of the remittance basis was counterproductive. Highly paid staff were driven away, and the economy suffered as a result.

“Attracting senior staff to Ireland is essential to get firms to set up here and create jobs. The IFSC is entirely dependent on skilled labour that can locate anywhere in the world. Often one highly skilled manager can be the anchor that keeps a team of 40 people in Dublin. If the manager leaves, the jobs go too. These changes reduce the risk that increasingly penal tax rates will cause an exodus of talent and the resulting loss of jobs and revenue.

“The changes make Ireland a more attractive location for financial services firms and reduce the costs of relocating business here. Almost every developed country has some mechanism for compensating highly skilled staff from overseas and these measures help to bring Ireland into line with competitor economies.

“The measures announced for the funds industry and for Islamic finance are also hugely important. The package of changes represents one of the most significant boosts for the IFSC in the last decade. It comes at a crucial time and will help make Ireland the location of choice as firms rebuild in the aftermath of the global economic crisis."