Taxing Times. Finance Bill & Current Tax Developments. October 2016

Transcription

1 Taxing Times Finance Bill 2016 & Current Tax Developments October 2016 kpmg/ie/financeact2016

2 KPMG is Ireland s leading Tax practice with almost 600 tax professionals based in Dublin, Belfast, Cork and Galway. Our clients range from dynamic and fast growing family businesses to individuals, partnerships and publicly quoted companies. KPMG tax professionals have an unrivalled understanding of business and industry issues, adding real value to tax based decision making. Corporate Tax Private Client Practice Global Mobility Services Employment Tax VAT International and Cross Border Tax For further information on Finance Act 2016 log on to: kpmg.ie/financeact2016

3 TaxingTimes Finance Bill Introduction Conor O Brien The Government published Finance Bill 2016 on 20 October The bill contains the taxation measures announced in the Minister for Finance s Budget speech on 11 October 2016 as well as a small number of measures not previously announced. The bill continues Ireland s decades long policy of offering a stable, predictable corporation tax regime with a low rate. This combined with other advantages such as a well educated English speaking workforce, a stable and efficient legal and governmental environment and EU membership have ensured that Ireland remains the location of choice for many of the world s leading businesses. We have long advocated improvements in the competitiveness of Ireland s personal taxation regime to complement and support the corporation tax offering. The ability to attract and retain senior mobile talent and domestic entrepreneurs is growing increasingly important due to changes in international tax law. In this regard, we welcome the personal tax reductions included in the bill. In addition to increasing competitiveness they, together with reductions included in last year s bill, represent welcome relief to a populace which had endured years of personal tax increases. These measures include: A 0.5% cut in the rate of USC for low to middle incomes A reduction in the rate of capital gains tax from 20% to 10% on up to 1 million of gains earned by entrepreneurs Introduction of a first time house buyer s tax credit with a value of up to 20,000 An increase in the main exempt CAT threshold from 280K to 310K with proportionate increases in the other thresholds A further closing of the gap between the tax credit available to the employed and the self-employed A phased reduction of the rate of DIRT by 8% over four years A phased restoration of full interest relief for landlords over a five year period A commitment to introduce a share incentive scheme for SMEs by 2018 A 2,000 increase in the rent a room relief Extension of the Special Assignee Relief Programme (SARP), Foreign Earnings Deduction (FED) and Start your own business reliefs The bill includes a small number of measures not announced in the Budget. In particular there are provisions to tax profits earned by non residents from investments in funds holding Irish property. It is important that Ireland continues its practice of providing predictability and certainty to investors and caution should be exercised in making any future legislative changes affecting investors. The bill also provides for both the widening and the extension of the bank levy. We look forward to the day when the taxation of banks will return to normality. In this regard it is worth bearing in mind that the cost of taxes levied on banks, and indeed on all corporations, must ultimately fall on individuals - shareholders, employees or customers. Ireland remains a small peripheral economy with relatively few mineral resources. It must continue to compensate for the external diseconomies that result from this position by continuing its longstanding pro business policies. In this regard it is to be hoped that in future years the policy of singling out incomes over 70,000 for no tax relief will end. The top 1% of income earners are already paying more tax than the bottom 75% combined and carry an extraordinarily high share of the taxation burden by comparison with virtually every other comparable economy. Also, it is to be hoped that the lifetime limit for eligibility for the entrepreneur s rate of capital gains tax will be increased to a level comparable to that in the UK. Progress in these areas, together with broader tax reductions can optimise Ireland s competitiveness and hence the prospects for long term, sustainable growth and employment for all our people. Conor O Brien Head of Tax and Legal Services Personal Tax 2 Employee Issues 4 & Pensions Business Tax 6 Agri Business 10 Financial Services 12 Property 16 & Construction Indirect taxes 18 Tax Rates 20 & Credits 2017

4 2 Taxing Times Finance Bill 2016 Personal Tax Robert Dowley Universal Social Charge (USC) The bill gives effect to the changes to the Universal Social Charge (USC) rates and thresholds announced in the Budget. Full details of the revised rates and thresholds are available in the Tax Rates and Credits 2017 table at the end of this publication. The bill confirms that these changes take effect for 2017 and subsequent years. The bill also contains a technical amendment in relation to individuals who have more than one employment. The amendment ensures that, where such individuals are paid weekly in respect of one employment and fortnightly in respect of another, they do not benefit from an unintended reduction in their USC liability. Earned income credit In last year s Budget, the minister introduced an earned income tax credit of 550 per annum for the selfemployed. This was intended to partly reduce the tax differential in how the self-employed and employees are taxed. In line with his commitment last year to introduce further reform if returned to government, the bill includes a provision to increase the earned income tax credit to 950 per annum. This increased tax credit will take effect for 2017 and subsequent years.

5 Taxing Times Finance Bill While this increase in the earned income credit will be welcomed, a significant differential still remains in the form of: (i) a difference of 700 between the PAYE employee tax credit and the earned income tax credit, and (ii) the self-employed earning over 100,000 being liable to USC at a rate of 11% whereas the maximum rate of USC payable on employment income is 8%. Home carer credit The home carer credit is intended to assist families who care for a child or dependent relative in the home. This is achieved by giving the carer s spouse or civil partner an additional tax credit against the tax payable on their income. In last year s Budget, the minister announced an increase in the credit from 810 to 1,000. The bill includes a provision to increase the tax credit to 1,100 per annum for 2017 and subsequent years. The full tax credit is available where the carer s income is 7,200 or less. A reduced tax credit will apply for incomes up to 9,400 (previously 9,200). Capital acquisitions tax thresholds In his Budget speech, the minister announced increases to each of the three tax-free thresholds that apply to gifts and inheritances. Full details of the revised rates and thresholds are available in the Tax Rates and Credits 2017 table at the end of this publication. The bill clarifies that the increased thresholds apply to gifts and inheritances taken on or after 12 October Tax treatment of married persons and civil partners The bill allows for married persons and civil partners to elect to be jointly assessed to tax for a year prior to the current year of assessment, as long as neither individual was not automatically required to file a tax return for that year as a chargeable person. This may allow married persons and civil partners to claim a tax refund for prior years for which they were not previously jointly assessed to tax. The materials published with the bill link this measure to the roll-out of a new PAYE online service. The four-year time limit still applies in relation to amending prior year tax returns.

6 4 Taxing Times Finance Bill 2016 Employee Issues & Pensions Eric Wallace Special Assignee Relief Programme (SARP) The bill confirms the Budget Day announcement by the minister that the Special Assignee Relief Programme (SARP) is to be extended for a further three years to the end of The relief was introduced in 2012 as part of the Government s strategy to attract inward investment to Ireland. The aim of the programme is to encourage the relocation to Ireland of key talent from within multinational groups. The relief requires a number of conditions to be satisfied, including that the employee has worked outside of Ireland for the same multinational group for at least six months immediately before their arrival in Ireland. Where the necessary conditions are met, the relief provides for a 30% reduction in an employee s taxable remuneration in excess of 75,000. Despite recommendations to Government that the conditions be relaxed, no such changes are included in the bill. Retirement benefits Personal Retirement Savings Account (PRSA) A Personal Retirement Savings Account (PRSA) is a long-term savings account designed to assist people to save for their retirement. A PRSA can be used to defer the taking of pension benefits, as there is neither a taxable pension nor a benefit crystallisation event until the PRSA vests. The law is being amended to confirm Revenue s view that the PRSA is deemed to vest on the 75th birthday of the individual. Furthermore, a PRSA held by an individual who has reached the age of 75 years prior to the date of passing of Finance Act 2016 and whose PRSA has not otherwise vested, will be deemed to vest on the date of the passing of the Act. The consequences of these changes are twofold: First, in the year of reaching the age of 75 years and annually thereafter, the deemed distribution rules will apply. Under these rules, a deemed distribution of taxable income will arise at rates of up to 6% of the PRSA fund value as at 30 November annually where actual distributions are not in excess of this amount. Secondly, the vesting of the PRSA is a benefit crystallisation event. On such an event the excess of the fund value over the standard fund threshold, currently 2 million, is taxed at 40%. The remainder of the excess used to provide other pension benefits is taxed again at 48%. The combined rate can be 69%. The current rules that apply to PRSAs that are vested prior to the death of a holder will now apply to PRSAs that are deemed to vest when the holder turns 75. These rules are as follows: No income tax arises on distributions to another Annuity Retirement Fund (ARF) in the name of the deceased spouse or civil partner, or to a child of the deceased who is under 21 years of age at the PRSA holder s death. A distribution to a child over 21 years of age is subject to a 30% rate of income tax.

7 Taxing Times Finance Bill Where a person dies before the age of 75 and before any benefits are taken from the PRSA, this unvested PRSA passes to the deceased owner s estate. These amendments will come into operation on the passing of the Act. The relief is valuable to sportspersons, who have a shorter than average working life, with limited ability to earn a living post-retirement. The current legislation provides that the 40% deduction is ignored for the purposes of computing tax relief for contributions to a personal pension plan. The bill extends this treatment to contributions to a PRSA for 2017 and subsequent years. Foreign Earnings Deduction (FED) The Foreign Earnings Deduction (FED) relief is being extended until the end of 2020, with some improvements to the relief. The relief was originally introduced in Finance Act 2012 with the aim of assisting companies to expand into emerging markets. The original relief provided for an income tax deduction up to a maximum of 35,000 for employees who spent a sufficient number of days working in Brazil, Russia, India, China or South Africa. The Government has improved the relief since its introduction. The list of qualifying countries gradually increased to a total of 28 prior to Budget The bill confirms that Colombia and Pakistan will be added to the list of qualifying countries for 2017 and subsequent years. In addition, the minimum number of days working abroad in order to qualify for the relief has been reduced from 40 to 30 days per annum. However, the income tax deduction remains capped at 35,000 per annum. These amendments form part of the measures intended to encourage Irish businesses to seek out opportunities to grow their activities in international markets. Sportspersons The bill also contains a PRSA-related measure that applies to retiring sportspersons. There is a longstanding relief for sportspersons whereby, when they retire, they are entitled to a tax rebate based on a 40% deduction from sportsrelated earnings over a 10-year period.

8 6 Taxing Times Finance Bill 2016 Business Tax Conor O Sullivan Start Your Own Business The bill confirms the extension of the Start Your Own Business scheme for a further two years to 31 December The scheme, which was introduced in Finance (No. 2) Act 2013, provides relief from income tax up to maximum earnings of 40,000 per annum for a period of two years for qualifying individuals. The relief applies to an individual setting up an unincorporated business. To qualify for the relief, the individual must have been unemployed for 12 months or more and in receipt of at least one of certain social welfare payments prior to establishing the business. Entrepreneurs CGT relief The bill also confirms that, for disposals made on or after 1 January 2017 and to which entrepreneurs relief applies, the applicable rate of capital gains tax is reduced from 20% to 10%. The relief applies to disposals of the whole or part of a qualifying trade or business owned by a qualifying individual for at least three years before disposal. An individual will be considered to be a qualifying person for the relief if they have worked as a director or employee of the company for three of the five years prior to disposal. Qualifying assets include shares in or assets of any company other than those involved in certain excluded activities, such as dealing in shares, securities, commodities, land or property. In addition, a disposal of shares will only qualify to the extent the individual holds 5% or more of the ordinary share capital. As indicated by the minister in his Budget speech, all other aspects of the relief remain unchanged, including the lifetime limit of 1 million of chargeable gains to which the relief can apply. The minister has signalled his intention to review the 1 million lifetime limit in future Budgets. While the reduction in the rate is a welcome improvement, it is disappointing that the lifetime limit has not been increased, particularly to ensure the relief is competitive with that currently available in the UK, where the total lifetime limit is 10 million.

9 Taxing Times Finance Bill Anna Scally Employment and Investment Incentive (EII) and Seed Capital Scheme relief (SCS) Introduced in Finance Act 2011 to replace the Business Expansion Scheme, the EII is designed to encourage investment by individuals in small and medium-sized companies. When first introduced, it was subject to the high earners restriction, which limits the use of certain income tax reliefs and exemptions by high-earning individuals. Finance (No. 2) Act 2013 had previously provided that investments in qualifying companies made after 15 October 2013 and before 1 January 2017 would not be subject to the high earners restriction. The bill extends the exclusion of EII and SCS relief from the high earners restriction in respect of a subscription for eligible shares made on or after 1 January This should greatly assist small and mediumsized companies to continue to raise investment. A number of technical amendments have also been made to EII and SCS relief: The date from which interest will be charged is delayed from 5 April to 31 December of the year in which an assessment is raised on an individual taxed under the PAYE system as a result of the withdrawal of relief, where the subscription for shares was found to be part of a tax avoidance scheme or arrangement. The legislation is also amended in respect of shares issued on or after 13 October 2015 to ensure that Revenue can continue to publish information relating to companies that raise qualifying investments, notwithstanding any obligations in relation to taxpayer confidentiality imposed under the Taxes Acts. Country-by-Country (CbC) Report Amendments Under the CbC rules that apply in Ireland, an Irish-resident parent company of a large multinational (MNE) group is required to provide a CbC report annually to the Revenue where its annual consolidated revenue in the preceding fiscal year was 750 million or more. The bill outlines some minor amendments and clarifications to the CbC regulations which were introduced in In particular, it amends the legislation to provide the Revenue with additional powers in relation to defining the filing obligations of an entity within a non EU-parented MNE group and the related notification requirements. The bill confirms that a CbC report can be filed for a period of less than 12 months if the ultimate parent entity of an MNE group prepares its financial statements for a shorter period, and that the CbC report must include the tax identification numbers of all entities within the MNE group. Another point to note is the confirmation in the bill that the penalty provisions and record-keeping obligations for Irish-resident entities are the same regardless of whether the entity is filing a full CbC report or a shortened version. The amendments apply in respect of accounting periods ending on or after the date of the passing of this Act.

10 8 Taxing Times Finance Bill 2016 Marie Armstrong Exchange of information on advance cross-border rulings and Advance Pricing Arrangements (APAs) with other member states The bill includes a provision to allow for the exchange of information on advance cross-border rulings and APAs with other EU member states. The new provision specifies the supplementary information that the Revenue may now provide to other member states in addition to the advance cross-border rulings and APAs. The supplementary information includes details of the main business activity, annual turnover, and profit or loss of the relevant entity. This section is subject to a commencement order. Non-resident trusts The bill introduces an exclusion to the capital gains tax charge on beneficiaries of non-resident trusts who are Irish-domiciled and Irish-resident or ordinarily resident. This is in response to concerns that the existing provisions are incompatible with EU law. Broadly, under these provisions, such beneficiaries are chargeable to Irish capital gains tax on any gains made by the non-resident trust. The bill provides that the capital gains tax charge shall not apply where it can be shown to Revenue that the trust was established for bona fide commercial reasons and did not form part of an arrangement of which the main purpose or one of the main purposes was the avoidance of liability to capital gains tax. Tackling tax evasion On foot of the recent widely publicised instances of possible offshore tax evasion, the bill includes measures to give effect to the minister s pledge to penalise any such evasion severely. These measures will remove taxpayers ability to avail of reduced penalties when making a qualifying disclosure which relates directly or indirectly to an offshore matter in respect of which Irish tax is payable. An offshore matter is defined to include offshore bank accounts, offshore income and gains and offshore property which are reportable under the EU Council Directive on Mandatory Automatic Exchange of Information or under the OECD Standard for Automatic Exchange of Financial Account Information, and which give rise to an Irish tax liability. If an offshore matter is discovered prior to an otherwise qualifying disclosure being made, or subsequently, the taxpayer s ability to claim reduced penalties is limited to circumstances where the penalty arose from carelessness but not deliberate default. The section is quite widely drafted as it includes matters that indirectly relate to offshore matters, and that are known or become known at any time to Revenue. This measure will apply to all Irish taxes and to qualifying disclosures (either prompted or unprompted) for all Irish tax heads made from 1 May 2017.

11 Taxing Times Finance Bill National Concert Hall The National Cultural Institutions (National Concert Hall) Act 2015 (the NCH Act) established the National Concert Hall (NCH) as a statutory body and provided that certain assets will be transferred to NCH by the company through which NCH activities were previously carried on. The bill provides that stamp duty will not be chargeable on any transfer or lease of land to NCH in connection with its functions under the NCH Act. Publication of tax defaulters Where a taxpayer enters into a settlement with Revenue in respect of outstanding taxes, interest and penalties, part of the settlement may relate to a qualifying disclosure which benefits from reduced penalties, and part of the settlement may not derive from a qualifying disclosure. A tax defaulter who has not paid a settlement amount due will also have this fact noted in the published particulars. The minister is no longer obligated to increase the monetary limit for the publication of tax defaulters every five years (in line with the consumer price index). This is now left to the discretion of the minister. The bill confirms that only that amount of the settlement that does not relate to a qualifying disclosure will be published in the list of tax defaulters in respect of the taxpayer s overall settlement with Revenue. This applies to settlements made from 1 January 2017.

12 10 Taxing Times Finance Bill 2016 Agri Business Michael Farrell Farming and fishing The bill provides for a number of measures announced on Budget Day to assist the farming and fishing sectors. Income averaging step-out The net accounting profit is the normal basis for calculating taxable profits of any business, including farming. Income averaging is an alternative method of calculating taxable profits of a farming business. This works by averaging taxable profits over a five-year period on a rolling basis, with the objective of counteracting volatility in taxable income. Where the profit level is increasing, income averaging reduces the tax liability for the most recent year. However, where profits reduce, the tax liability for a year may be higher than the actual liability for that year alone. The bill introduces legislation to allow a farmer who is facing an exceptionally poor year to elect to step-out of income averaging for one year. That farmer will then pay tax due on the actual profits of that year, with any deferred liability becoming payable over the subsequent four years. The election must be made in the tax return for the year in question and can only be made every five years. This option will be available for the 2016 and subsequent tax years. Farm restructuring relief Capital gains tax relief for farm restructuring was introduced in Budget This relief applies where the proceeds of the sale of farm land are reinvested in other farm land and a number of conditions are met. To benefit, the sale and purchase must occur within 24 months of each other. The minister announced on Budget Day that this relief would be extended by three years to 31 December The bill provides for this, subject to a commencement order being signed. All other terms of this relief remain unchanged. Accelerated capital allowances for energyefficient equipment As announced on Budget Day and in line with a recommendation of the 2014 agri-tax review, the regime of accelerated capital allowances for investment in energy-efficient equipment is being extended to sole-traders and noncorporates. This regime was previously available only to companies. This will assist businesses in the farming and marine sectors to invest in energyefficient equipment. Under this regime, the full cost of acquiring qualifying energy-efficient equipment can be written off against tax in the year of purchase. Such claims can be made only in respect of equipment that is included on the specified list maintained by the Sustainable Energy Authority of Ireland. This regime will not be available to lessors of such equipment.

13 Taxing Times Finance Bill Flat-rate VAT addition As noted in the Indirect Taxes article, the bill confirms that the flat-rate VAT addition that is available to unregistered farmers will increase from 5.2% to 5.4% with effect from 1 January This flat-rate addition compensates unregistered farmers for VAT on their farming costs. The bill includes measures that provide the minister with power to remove the flat-rate addition in relation to any agricultural sector where the flat-rate addition exceeds the non-recoverable VAT incurred by unregistered farmers in that sector. Raised bogs The bill gives effect to the Budget Day announcement that compensation payments under the new raised bog restoration incentive scheme will be exempt from capital gains tax. This includes amounts received for certain land sales. Compensation payments received on or after 1 October 2016 will qualify for the relief. Fisher tax credit As announced on Budget Day and in line with a recommendation of the 2015 marine tax review, the bill introduces an income tax credit of 1,270 for fishers who have fished for wild fish (excluding salmon and freshwater eels) or wild shellfish for at least 8 hours a day for 80 days in a tax year. This credit will shelter income of up to 6,350 per annum and is available from 2017 to 2021 inclusive. Where a fisher claims this credit, the fisher will not be entitled to also claim the seafarer allowance. That allowance, which is of equal value, is available to those that are at sea for at least 161 days in a tax year. Decommissioning of fishing vessels Compensation payments are available in respect of the decommissioning of fishing vehicles. Current tax legislation provides that retirement relief from capital gains tax is available in respect of these payments. Also, any balancing charge arising as a result of the receipt of a decommissioning payment can be spread evenly over five years. The bill updates these provisions to include the latest EU vessel decommissioning scheme. These updates are subject to a commencement order being signed.

14 12 Taxing Times Finance Bill 2016 Financial Services Brian Daly Section 110 Securitisation Regime Ireland s securitisation regime has been the subject of much discussion in recent months. In his Budget speech, the Minister for Finance reiterated the benefit Ireland s securitisation regime has been to our financial services industry. However, he suggested that the provisions are being used in ways which were not intended when the relevant section was introduced, particularly in relation to funds and property. A draft of the legislative amendments designed to address these concerns was published on 6 September After a period of consultation, a somewhat modified version of these proposals has been included in the Finance Bill. Taxing profits from Specified Mortgages In broad terms, it is proposed that new rules will apply to the extent that a qualifying securitisation company owns or manages specified mortgages, defined as: (i) loans which are secured on and which derive their value or the greater part of their value (directly or indirectly) from Irish land and buildings; or (ii) swaps or similar derivatives which derive their value or the greater part of their value (directly or indirectly) from Irish land and buildings or a loan to which (i) applies. These assets are to be treated as part of a separate business, to be known as a specified property business carried on by the company. Anti-avoidance provisions have been included in the bill to counteract schemes designed to artificially reduce that part of the value of a loan/swap derivative which is derived from Irish land and buildings. Where a Section 110 company is subject to the new regime, the general securitisation rules will continue to apply to this specified property business. However, interest deductions in respect of profit-participating loans will be restricted to the amount of interest that would have been payable on that loan had it been a non-profitparticipating loan entered into by way of a bargain made at arm s length.

15 Taxing Times Finance Bill Gareth Bryan Exclusions Where a number of conditions are met, the following types of securitisation transactions will not be subject to the new rules: Collateralised Loan Obligation (CLO) transactions Commercial Mortgaged Backed Security (CMBS) transactions Residential Mortgage Backed Security (RMBS) transactions Loan origination businesses The new rules provide that interest to which withholding tax applies will not be restricted (as collecting withholding tax would effectively collect tax on the distribution of the company s profits). In addition, no restriction is to apply in respect of interest paid to: Irish tax-resident individuals, Irish tax-resident companies, and foreign companies which earn the interest as part of a trade carried on through an Irish branch Irish and EU pension funds Certain EU/EEA nationals and EU/EEA registered companies which are subject to tax in an EU/ EEA member state, provided that the interest is subject to tax without the benefit of any notional interest deductions computed with reference to the amount of interest they receive on the profitparticipating debt The exclusion for EU/EEA persons is subject to anti-avoidance rules, and where the recipient is a company, it must carry on genuine economic activities in an EU/EEA member state. Impact As a result of these changes, securitisation companies which purchased loans secured on Irish property at a discount could now be subject to Irish corporation tax at the rate of 25% on a significant part of the gains realised on those investments. These new rules apply to accounting periods commencing on or after 6 September However, where a company has an accounting period spanning this date, that period will be notionally split, with the new rules applying to the second part. It is worth noting that many Section 110 companies to which the new rules will apply would not have recognised in their accounts unrealised gains which accrued prior to 6 September 2016 (due to accounting concepts whereby such gains are not accounted for until they are actually realised). As Section 110 companies use a measure of accounting profits as their basis for taxation, these companies will be subject to the new rules in respect of these unrecognised gains notwithstanding that the increase in value in the assets will have occurred prior to the change in law. The absence of any recognition of this fact will mean that, for example, a Section 110 company which purchased specified mortgages several years ago and realised the gains on these assets on or before 5 September 2016 will not have any restriction applied under the new rules, whereas if the company realised the gains on those assets the next day, all of the gains that accrued since acquisition would be affected. Many would see such a result as disproportionate and inequitable. Revenue notification Previously, companies electing into the Section 110 regime were required to file a once-off notification with Revenue prior to filing their corporation tax return. The new legislation also requires that a company wishing to elect into the Section 110 regime must now file the notification to do so within eight weeks of its commencement of activities, and must also provide additional information in respect of its activities, including details of the type of transaction, assets acquired, name of originator, details of any intragroup transactions, and names of any connected parties. These changes apply to all new Section 110 companies, not just those that own or manage specified mortgages. Taxation of Irish real estate funds As indicated by the Minister for Finance in his Budget speech, the bill contains changes to the tax treatment of certain Irish regulated funds which hold Irish real estate assets. The bill introduces a new withholding tax in respect of certain Irish property-related distributions and redemptions made by Irish real estate funds (IREFs) to certain unit holders not within the charge to Irish tax. Defining the IREF The rules will apply to non-ucits authorised funds established as unit trusts, investment companies, or Irish collective asset-management vehicles (ICAVs). Such a fund will be treated as an IREF where 25% or more of the market value of its assets is derived (directly or indirectly) from IREF

16 14 Taxing Times Finance Bill 2016 Kevin Cohen assets. These are defined as Irish land and buildings or other assets used by the fund in its IREF business which derive their value (or the greater part thereof) from Irish land and buildings. A fund is also caught where it would be reasonable to consider that its main purpose (or one of its main purposes) was to acquire IREF assets or carry on an IREF business. Where the fund is an umbrella fund, the new rules will be applied at the sub-fund level. An IREF business is defined as activities involving Irish land and buildings which, but for the general tax exemptions applied to funds, would: be regarded as dealing in or developing land; give rise to taxable rental income on Irish property; involve the holding of Irish land and buildings or other assets which derive their value (or the greater part thereof) directly or indirectly from Irish land and buildings, the disposal of which would be chargeable to capital gains tax; or be regarded as trading in land (and taxed as a trading activity). IREF withholding tax Where a fund is treated as an IREF, withholding tax (at a rate of 20%) is to be applied to distributions and redemptions made out of IREF profits. This withholding tax will represent a final tax charge on such payments and must be returned each year by the IREF to the Irish Revenue Commissioners. Gains arising on the disposal of Irish land to a party unconnected with the IREF or any of its investors are excluded, provided that the IREF has owned the land for at least five years and the disposal is at market value. IREF profits are computed in line with the general Irish tax computational rules. Persons affected IREF withholding tax is to apply to distributions to specified persons, which includes: Unit holders who do not suffer investment undertaking tax (IUT) on distributions, redemptions, or disposals in respect of their units (although unit holders who are obliged to self-assess for tax should not be treated as a specific person ) Unit holders who are treated as not having gains arising in respect of distributions, redemptions, or disposals in respect of their units because the investor qualifies for one of a number of exemptions from IUT (this would include Irish investors such as pension schemes, life assurance companies, regulated funds, charities, credit unions and Section 110 securitisation companies). In broad terms, this approach seeks to apply the new IREF withholding tax to those investors who do not suffer IUT (and to exclude those who suffer IUT, as doing otherwise would result in double taxation). However, the IREF legislation then seeks to exclude certain types of good investors from the new tax, such as: Certain Irish and EU pension funds/schemes (where they hold their investment either directly or indirectly through another entity/ person) Funds regulated in Ireland or another EU/EEA member state Life assurance funds authorised and regulated by Ireland or another EU/ EEA member state Impact of new rules The new provisions will result in an Irish tax charge (at a rate of 20%) for certain investors in Irish funds who have, heretofore, been fully exempt from Irish tax on their investments. This new charge will be limited to distributions out of certain income and gains arising on Irish real estate assets or redemption derived from such profits. It will nevertheless be

17 Taxing Times Finance Bill unwelcome news for many investors and affected funds, particularly those who made an investment decision on the basis of the current law and who may be unable to readily exit their positions due to the illiquid nature of real estate. The new rules will apply in respect of accounting periods commencing on or after 1 January 2017, though funds which change their accounting year end on or after 20 October 2016 will also be caught. Bank levy The bank levy was introduced in 2013 for three years with the aim of raising an annual yield for the Exchequer of approx. 150 million. This was achieved by levying banks at a rate of 35% of the amount of DIRT paid for 2011 (the base year). In October 2015, the minister announced the extension of the levy to There was consultation regarding the methodology to be used, on the understanding that the overall tax yield of 150 million per annum should be maintained. The bill proposes that the base year for 2017 and 2018 will be 2015; for 2019 and 2020 will be 2017; and for 2021 will be The rate of the levy has been increased to 59% of the DIRT paid in the base year presumably because of the reduction in interest rates in recent years causing a reduction in the level of DIRT paid in 2015 (the new base year). One would hope that if the amount of DIRT paid rises between now and 2021, the rate of the levy will be reduced so that banks are not collectively subject to a higher levy than the targeted 150 million per annum. There are a number of technical changes to the definition of the banks which are subject to the levy. It previously applied to banks which held, in 2011, a licence under either section 9 of the Central Bank Act 1971 or a corresponding licence in an EU Member State. Licensed banks from EEA countries (and not just EU member states) and non-eea banks with an authorisation from the Central Bank of Ireland are now also within the scope of the levy if they had a DIRT liability in excess of 100,000 in the base year. Deposit Interest Retention Tax (DIRT) The bill confirms the announcement in the Budget that the rate of deposit interest retention tax (DIRT) will be reduced by 2% each year for the next four years, bringing the rate down from the current rate of 41% to 33% by The rate of tax that applies to interest on foreign deposits is as follows: In the case of EU deposits, interest is taxed at the rate of DIRT that applies in a given year. In the case of non-eu deposits, interest is taxed at the rate of DIRT that applies in a given year if the recipient pays income tax at the standard rate. If the recipient pays income tax at the higher rate, the interest is taxed at the marginal rate for the year. As the DIRT rate will be lower than the marginal income tax rate for 2017 and subsequent years, the bill provides that the favourable treatment outlined above will only apply where the income tax liability in respect of foreign deposit interest is discharged on or before the due date for filing the income tax return for the year.

18 16 Taxing Times Finance Bill 2016 Property & Construction Jim Clery Increasing the supply of residential housing The bill formally introduces a Help to Buy scheme designed to assist first-time buyers to fund the deposit required to be eligible for a mortgage under the Central Bank s macro-prudential rules. The objective of the new scheme is to create additional demand for houses, given that market trends suggest that increased demand will lead to increased supply. We think this is correct and that the measure should help to increase supply. The scheme will take the form of a rebate of Irish income tax paid over the previous four tax years, which will serve as a contribution to the deposit needed to fund the purchase or self-build of a new home. The maximum rebate available will be 5% of the purchase price or approved valuation of the new home, up to a maximum tax rebate of 20,000. The key elements of the scheme are: Operation of the scheme: The onus is on the first-time buyer to be satisfied the vendor is a qualifying contractor (adopting similar principles to those used in the Relevant Contracts Tax regime). Rebates will be available for eligible purchases and self-builds/first mortgage drawdowns from 19 July 2016 until the end of 2019, although no applications or claims can be made after 31 December Applicants will be able to apply for the rebate on a Revenue webpage from January The application and claim process will include confirmation that a number of conditions have been met, both by the claimant and the qualifying contractor in the case of a purchase or the solicitor acting for the claimant in the case of a self-build. For the claimant, this includes that they have complied with their income tax and USC filing and payment obligations, and have been issued with a tax clearance certificate. The application is typically valid until 31 December in the tax year of application. Following the application, the Revenue Commissioners will notify the applicant of the maximum rebate available, which the claimant can then give to their lender or qualifying contractor. For acquisitions up to 31 December 2016, the refund will be made directly to the first-time buyer who funded the deposit. For acquisitions after that date, the refund will be made directly to the qualifying contractor in the case of a purchase and to the lender in the case of a self-build. Where a first-time buyer claims relief under the Help to Buy scheme, they cannot claim relief for a refund of DIRT on their savings to fund the deposit for the same dwelling. Qualifying First time buyer New build/self-build Principal private residence Occupation for 5 years as claimant s only or main residence Up to 600,000 property value (rebate capped at 20,000) Mortgage of at least 70% of the purchase price / valuation approved by the mortgage provider Contracts signed on or after 19 July 2016 / Self-builds where the first tranche of mortgage drawdown was on or after 19 July 2016 Acquisitions of new properties from a qualifying contractor as defined Sufficient income tax paid in the last 4 years (income tax includes DIRT but excludes USC) Loans used wholly and exclusively for the purchase / building of the property and solely between the first time buyer and the lender Not Qualifying Non first time buyer / Joint purchase where all parties not first time buyers Second hand Buy to let / Second homes Occupation for less than 5 years will result in a clawback of the relief on a sliding scale depending on when the cessation occurs > 600,000 property value Cash buyers or a mortgage of < 70% of purchase price / approved valuation Contract signed pre 19 July 2016 / Self builds where the first mortgage drawdown was before 19 July 2016 Acquisitions of new properties from a vendor that is not tax compliant Insufficient income tax paid in the last 4 years will reduce the benefit Loans used partly for the purchase / building of the property or where other non first time buyers are also parties to the loan Rental income landlord interest deductions on residential properties The bill introduces measures that will restore full interest deductibility for landlords of residential properties on a phased basis, starting in For the 2017 tax year, the deduction available for interest on borrowings used by a landlord to fund the purchase, improvement or repair of a residential property will increase from 75% to 80%. The deductible amount will increase by instalments of 5% per year thereafter until the 100% deduction is restored in 2021.

19 Taxing Times Finance Bill Living City Initiative The Living City Initiative is aimed at regenerating retail and commercial districts and at encouraging families to live in historic buildings in the centres of Dublin, Cork, Limerick, Waterford, Galway and Kilkenny. The scheme originally only provided relief for an owner-occupier of residential premises. The bill introduces measures to extend the relief to landlords, remove the limit on the floor size of a qualifying property, reduce the de minimis spend to 5,000 (previously 10% of open market value), and relax restrictions where capital grants were received. The relief is intended to promote regeneration works on buildings built prior to 1915 but, because of the cost of refurbishing old buildings, the take-up to date has been low. The inclusion of residential landlords in the relief will hopefully change this. However, the fact that the relief remains subject to the higher earners restriction is unhelpful. The capping of relief at 200,000 per project (irrespective of the number of investors) for commercial premises and rented dwellings in order to comply with EU state aid rules is also an issue in practice. Home Renovation Incentive The Home Renovation Incentive scheme seeks to incentivise individuals to upgrade their homes using tax-compliant contractors. The relief was due to expire on 31 December The bill has extended the relief which is available for upgrades to second-hand homes by two years to 31 December This is welcome given the popularity of the scheme in allowing relief for refurbishments by individuals who renovate or improve their homes and for rental properties owned by landlords. Rent-a-Room scheme The threshold for exempt income under the Rent-a-Room scheme is being increased to 14,000 per annum from the current amount of 12,000. Changes to Section 110 and funds legislation The bill includes proposed amendments to Section 110 legislation and to Real Estate Funds. These significant changes are discussed further in the Financial Services article.

20 18 Taxing Times Finance Bill 2016 Indirect Taxes Niall Campbell VAT rates There are no changes to the scope of the goods and services falling within the 0% rate, the 9% and 13.5% reduced rates, and the 23% standard rate of VAT. Farmers flat-rate addition The bill confirms the announcement in the Budget that the flat-rate addition (which compensates unregistered farmers for irrecoverable VAT on their purchases) will increase from 5.2% to 5.4% with effect from 1 January Separately, the bill empowers the minister, with effect from 1 January 2017, to make an order excluding specified agricultural goods or services from the flat-rate addition. This will apply where, following a review by the Revenue, the minister is satisfied that the flat-rate addition is overcompensating farmers in a particular sector for irrecoverable VAT incurred. Although there is no immediate change, farmers and agricultural producers should be aware of the potential for the flat-rate addition to be removed in respect of specified transactions. This should be borne in mind, particularly where long-term contracts are being negotiated. Property holding funds As described in the Financial Services article, the bill introduces amendments to the corporate tax regime applying to Section 110 companies and other funds engaged in Irish property transactions. While these amendments do not directly affect the VAT exemption for the management of qualifying funds including Section 110 companies, the VAT implications should be considered in respect of any reorganisation or alternative structuring of current or future property transactions, particularly where the underlying business is not entitled to full VAT recovery (e.g. VATexempt residential letting).

21 Taxing Times Finance Bill Terry O'Neill VAT recovery for partially exempt businesses The bill contains amendments to the provisions in relation to the apportionment of VAT on general overhead costs for partially VAT-exempt entities. The amendments provide that the proportion of recoverable VAT on general overhead costs should be calculated using a turnover method in the first instance. However, where the turnover method does not correctly reflect the use of the overhead costs, an alternative method of apportionment must be used. This amendment effectively adds an additional requirement in the annual exercise which must be carried out by partially exempt businesses to determine the most appropriate VAT recovery method. In view of these changes, all partially VATexempt entities should consider the appropriateness of their VAT recovery rate methods. Excise duty There are a number of excise-related measures included in the bill. These provisions are: Confirmation of the excise duty increase announced on Budget Day, which amounts to 50 cents (VAT inclusive) on a pack of 20 cigarettes, with pro-rata increases on other tobacco products. Extension of the relief from Alcohol Products Tax to beer brewed in micro-breweries. The production threshold for eligibility to the relief is to be increased from 30,000 to 40,000 hectolitres per annum, with relief being granted for up to 30,000 hectolitres per annum. Extension of the relief from Vehicle Registration Tax (VRT) to hybrid electric vehicles and electric vehicles until 31 December 2018 and 31 December 2021 respectively. Extension of, and amendment to, the Natural Gas Carbon Tax, Excise Duty and Mineral Oil Tax regimes. Inclusion of additional provisions and control measures in relation to authorised consignors and consignees of excisable products.

22 18 Taxing Times Finance Bill 2016 Tax Rates and Credits 2017 Personal income tax rates (unchanged) At 20%, first At 40% Single person 33,800 Balance Married couple/civil partnership (one income) 42,800 Balance Married couple/civil partnership (two incomes) * 67,600 Balance One parent/widowed parent/surviving civil partner 37,800 Balance * 42,800 with an increase of 24,800 maximum Personal tax credits (changed) Single person 1,650 Married couple/civil partnership 3,300 Single person child carer credit 1,650 Additional credit for certain widowed persons/surviving civil partner 1,650 Employee credit 1,650 Earned income credit (increased)* 950 Home carer credit (increased) 1,100 Rent credit - single and under 55 years (reduced) ** 40 * Applies to self employed income and certain PAYE employments not subject to the PAYE credit ** Rent credit will no longer apply from 2018 onwards Help to Buy Scheme Income tax rebate, capped at 20,000, for first time buyers of a principal private residence. The relief is 5% of the house value (capped at 400,000). Maximum relief (i.e. 20,000) available for homes valued between 400,000 and 600,000. There is no relief for houses valued greater than 600,000. Claimants must take out a mortgage of at least 70% of the purchase price. The scheme only applies to new builds and self builds and not to second hand properties. The relief is a rebate of income tax paid over the previous four years. The scheme takes effect from 19 July 2016 until 31 December Home Renovation Incentive Scheme Income tax credit split over two years for homeowners who carry out renovation/ improvement works on their principal private residence from 25 October 2013 to 31 December 2018 (extended by two years). The credit is calculated at a rate of 13.5% on all qualifying expenditure over 4,405 (ex VAT). The maximum credit is 4,050. Home loan interest relief granted at source on principal private residence* (changed) First time buyers loan taken out from 2009 to 2012 Years 3-5 Married/widowed ** Lower of 4,500 or 22.5% of interest paid Years 6-7 Married/widowed ** Lower of 4,000 or 20% of interest paid After year 7 (where applicable up to and including 2017) * Married/widowed ** Lower of 900 or 15% of interest paid Other mortgages, loans taken out from 2004 to 2012 Married/widowed ** Lower of 900 or 15% of interest paid First time buyers loan taken out from 2004 to 2008 Remainder of first 7 years of mortgage Married/widowed ** Lower of 6,000 or 30% of interest paid After year 7 and up to and including 2017 * Married/widowed ** Lower of 1,800 or 30% of interest paid Single persons Thresholds set at 50% of those outlined above for married/widowed persons * Loans taken out on or after 1 January 2013 do not qualify for Mortgage Interest Relief. The relief was to be abolished from the end of 2017 and subsequent tax years. To be extended to 2020 in Budget 2018 ** Applies to civil partnerships/surviving civil partner also Local Property Tax (varying rates) (unchanged) Market Value less than 1,000,000 * Market Value greater than 1,000,000: - First 1,000,000 - Balance 0.18% 0.18% 0.25% * Market Value less than 100,000 - calculated on 0.18% of 50,000. Market Value 100,000-1,000,000 assessed at mid-point of 50,000 band (i.e. property valued between 150,001 and 200,000, assessed on 0.18% of 175,000). - Applies to residential (not commercial) properties. Exemptions for houses in certain unfinished estates and newly constructed but unsold property. Exemption until 31 December 2016 for new and unused houses purchased between 1 January 2013 and 31 December 2016 and second hand property purchased between 1 January 2013 and 31 December Certain payment deferral options may be available for low income households - From 2015 onwards, local authorities can vary the basic LPT rates on residential properties in their administrative areas. These rates can be increased or decreased by up to 15% PRSI contribution, Universal Social Charge (changed) % Income Employer 10.75% No limit 8.50% If income is 376 p/w or less Employee** (class A1) PRSI 4% No limit * Universal Social Charge 0.5% (reduced) 0 to 12,012 ** 2.5% (reduced) 12,013 to 18,772*** 5.0% (reduced) 18,773 to 70,044**** 8% > 70,044 * Employees earning 352 or less p/w are exempt from PRSI. In any week in which an employee is subject to full-rate PRSI, all earnings are subject to PRSI. Unearned income for employees in excess of 3,174 p.a. is subject to PRSI. Sliding scale PRSI credit of max. 12 per week where weekly income between 352 and 424 ** Individuals with total income up to 13,000 are not subject to the Universal Social Charge *** Increase in upper limit of the 2.5% band from 18,668 to 18,772 **** Reduced rate (2.5%) applies for persons over 70 and/or with a full medical card, where the individual s income does not exceed 60,000 Self-employed PRSI contribution, Universal Social Charge (changed) % Income PRSI 4% No limit * Universal Social Charge 0.5% (reduced) 0 to 12,012 ** 2.5% (reduced) 12,013 to 18,772*** 5.0% (reduced) 18,773 to 70,044**** 8% 70,045 to 100,000 11% > 100,000 * Minimum annual PRSI contribution is 500 ** Individuals with total income up to 13,000 are not subject to the Universal Social Charge *** Increase in the upper limit of the 2.5% band from 18,668 to 18,772 **** Reduced rate (2.5%) applies for persons over 70 and/or with a full medical card, where the individual s income does not exceed 60,000 Tax relief for pensions (unchanged) - Tax relief for pensions remains at the marginal income tax rate - The Defined Benefit pension valuation factor is an age related factor that will vary with the individual s age at the point at which the pension rights are drawn down - Except where a Personal Fund Threshold applies, the Standard Fund Threshold is 2m Capital gains tax (changed) Rate 33% Entrepreneur relief (reduced rate) * 10% Annual exemption 1,270 * Relief remains capped at lifetime limit of 1m chargeable gains. 10% rate applies to disposals on or after 1 January 2017 Capital Acquisitions Tax (rate unchanged) Rate 33% Thresholds (increased) Group A * 310,000 Group B * 32,500 Group C * 16,250 * Applies to gifts and inheritances taken on or after 12 October 2016 Corporation Tax rates (unchanged) Standard rate 12.5% Knowledge Development Box rate 6.25% Residential land, not fully developed 25% Non-trading income rate 25% Value Added Tax (9% rate retained) Standard rate/lower rate/second lower rate 23%/13.5%/9% Flat rate for unregistered farmers 5.4% Cash receipts basis threshold 2m Deposit Interest Retention Tax (changed) DIRT (rate reduced) 39% *&**&*** * 41% rate will remain for exit taxes on financial products ** Refund of DIRT incurred in previous four years on savings (up to 20% of the purchase price) used by first time buyers to purchase a dwelling. This scheme is in place to the end of 2017 *** The rate of DIRT will be decreased by 2% each year for the next 4 years until it reaches 33% in 2020 Stamp Duty - commercial and other property (unchanged) 2% on commercial (non residential) properties and other forms of property, not otherwise exempt from duty. Stamp Duty - residential property (unchanged) 1% on properties valued up to 1,000,000 2% on balance of consideration in excess of 1,000,000

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