Tax Developments Promoting Growth of Indigenous Business and Attracting Foreign Direct Investment. Mark Barrett

Transcription

1 Tax Developments Promoting Growth of Indigenous Business and Attracting Foreign Direct Investment Mark Barrett

2 Overview Part 1: Tax Developments Promoting Growth for Indigenous Business Part 2: Tax Developments Attracting Foreign Direct Investment

3 Part 1 Tax Developments Promoting Growth for Indigenous Business

4 Tax Developments for Indigenous Business Corporation Tax Exemption for Start-up Companies Understanding Tax for New & Back to Work Hires The Employment and Investment Incentive Scheme (EIIS) Raising Tax Efficient Finance VAT the Essential Update

5 Corporation Tax Exemption for Start-up Companies Exemption from Corporation Tax for Start Up companies First introduced in 2009: Originally: New Company Relief for Profits/Gains of New Trade, Full relief where 40,000 or less Marginal relief re: profits 40,001 to 60,000 No relief where profits exceed 60,000 Available for first 3 years.

6 Corporation Tax Exemption for Start-up Companies In 2011 the Relief was amended to link to levels of employment: For accounting periods beginning on or after 1 January 2011: Relief linked to level of Employer s PRSI To max of 5,000 per employee Cap of 40,000 overall Extended in 2010, 2011 and 2012, FA2012: Now for companies that commence to trade in 2012, 2013 or 2014

7 Corporation Tax Exemption for Start-up Companies Exemption from Preliminary Tax New or Start-up Company CT liability of 200,000 or less For their first accounting period Not required to pay PT for that first accounting period Pay final CT liability when submit CT return

8 Understanding Tax for New & Back to Work Revenue Job Assist Incentives for Employers - IT59 Hires Double Wages deduction for up to 3 years Wages Employer s PRSI Employee criteria Unemployed for 12 months immediately before hiring During 12 months in receipt of certain benefits from DSP, including jobseeker s benefit/allowance, etc. or signing on, or certain schemes including Job Bridge, FAS training courses, Community Employment Scheme Qualifying Jobs: Minimum 30 hours per week Capable of lasting at least 12 months Exceptions: commission only / grant aided / previous employees unfairly dismissed / redundancies w/in previous 26 weeks / proprietary director or spouse/civil partner

9 Understanding Tax for New & Back to Work Hires Example from Revenue IT59: The saving to a sole trader under the Revenue Job Assist scheme, liable to income tax at 41%, employing a qualifying employee in a qualifying employment on a salary of 30,000 is as follows: Year Salary PRSI 10.75% Total Double deduction allowable in accounts Saving@ 41% 1 30,000 3,225 33,225 66,450 27, ,000 3,225 33,225 66,450 27, ,000 3,225 33,225 66,450 27, Total 81, In addition: employer may qualify for Employer Job (PRSI) scheme (no employer s PRSI for the first 18 months)

10 Understanding Tax for New & Back to Work Hires Revenue Job Assist (Long Term Unemployed taking up a Job) Incentives for Employees - IT58 Additional allowance for employees The relief in the first year of employment is 3,810 plus 1,270 for each child Reducing to two-thirds of that amount in Year 2 and one-third in Year 3 Criteria (as for employer): Continuously unemployed for at least 12 months, and either, In receipt of Jobseekers Allowance, Jobseekers Benefit, One Parent Family Payment, Blind Persons Pension, Disability Allowance or, With effect from the 01/01/06 Invalidity Pension for at least 12 months or Illness Benefit for at least 36 months

11 The Employment and Investment Incentive Scheme (EIIS) Introduction: The EIIS is a tax incentive scheme. Investors who purchase eligible shares in a qualifying company will be granted tax relief, thereby reducing the cost of their investment The EIIS is designed to promote investment in Irish companies and to foster job creation The EIIS provides an excellent opportunity for companies to raise capital EIIS replaced the BES (overlap between the two schemes)

12 EIIS Facts for Investors: Qualifying Individual: Irish tax-resident individual Not connected with the Company at any time during the specified period (starting two years before and ending three years after share issue) Relief of up to 41% of the investment: 30% initial relief in year 1 (specified relief) 11% contingent relief in year 4, if Company has increased either employee numbers (and no reduction in average pay) or its R&D expenditure (not a specified relief)

13 EIIS Holding period: 3 years (BES was 5 years) Investment: Minimum 250, Maximum 150,000 pa Capital Gains Tax: Where the shares are disposed of, the full acquisition cost can be deducted from the proceeds in an arms length sale However, if the shares are disposed of at a loss, the allowable loss for Capital Gains Tax purposes will be reduced by the relief granted Tax avoidance: Relief is not available unless shares are subscribed for and issued for bona fide commercial purposes and not as part of a scheme or arrangement the main purpose of which is the avoidance of tax Investment in shares which are subject to agreement, options or guarantees which provides for the disposal by investors at a price other than market value do not qualify for relief

14 EIIS Qualifying Company: Company size criteria (see next slide) Investment raised for purposes of carrying on Relevant Trading Activities; or R&D Relevant Trading Activities Broadly defined will include most trades Excludes: Financing Activities, Dealing in commodities, shares etc. Trading / Commence to trade w/in 2 years of share issue Green Energy Companies: Application for grid connection agreement deemed to amount to commencing relevant trading activities R&D Activities: Expend at least 30% of investment on R&D activities.

15 EIIS The company must be a Micro or Small enterprise or be a Medium sized enterprise which is located in an Assisted Area Size: Small Company Medium Company Employee Limit 50 Employees 250 Employees Financial Limit 10m Turnover / 10m Balance Sheet Additional N/A Requirement 50m Turnover / 50m Balance Sheet Located in Assisted Area Or Not beyond start-up stage Assisted Area : In summary assisted areas have been described as all areas in the State with the exception of counties Dublin, Meath, Kildare Wicklow and Cork (but including the Cork Docklands) Not beyond start-up stage : Start-up stage is not defined in the Community Guidelines on State Aid to Promote Risk Capital investments in Small and Medium- Sized Enterprises. However the phrase start-up capital is defined as meaning financing provided to companies, which have not sold their product or service commercially and are not yet generating a profit, for product development and initial marketing

16 Comparison of the BES and EIIS BES EIIS Qualifying investment 150,000 pa 150,000 pa Relief 41% in year of investment Specified relief yes 30% - yes 11% - no Holding period 5 years 3 years Funds company can raise Qualifying companies 1.5m pa 2m total. Limited: Manufacturing and international traded services 30% in year of investment 11% contingent, year 4 2.5m pa 10m total. Much Broader: Companies containing Relevant Trading Activities with special provisions for R&D and Green Energy companies

17 Feedback to date Three year period too short Impact of High Earners Restriction Exclusion of Medium Sized companies/foreign owned companies

18 VAT the Essential Update FA 2012: Standard rate increased to 23% from 1 January 2012 Reverse charge on supplies of construction services, in the State, between connected parties Travel agents margin scheme removal of provision allowing for issuing of a document re VAT on qualifying accommodation at qualifying conference

19 VAT the Essential Update FA 2012: Duty to keep records 6 years for liquidated companies Second reduced rate of 9% - re: Admission to Heritage Facilities, Open Farms (previously exempt lettings), District Heating Bread new definition Refund orders Suite of measures to prevent abuse of refund orders: assessment of tax due, interest payable, fixed penalty 4,000

20 Part 2 Tax Developments Attracting Foreign Direct Investment

21 Tax Developments & FDI FED in 2012 What You Need to Know R&D Tax Credits The Essentials

22 FED in 2012 What You Need to Know Foreign Earnings Deduction (FA2012) To encourage Irish businesses to seek opportunities in the dynamic BRICS economies (Brazil, Russia, India, China and South Africa) Deduction allowed against employment income of employees who perform their duties in BRICS countries FED does not extend to remuneration in the form of BIK or termination payments Deduction is for purposes of income tax only, (not PRSI or USC). Max value: 14,350 Maximum deduction 35,000 FED is a specified relief for the high earners restriction

23 FED Deduction is based on the ratio of days spent in BRICS countries in the year The Employee must spend a minimum of 60 days in BRICS states Only visits lasting a minimum of 4 days count towards the 60 day threshold Formula: Where: D = number of qualifying days in a year of assessment E = qualifying income F = aggregate number of days in the year of assessment that the individual held a relevant office or employment

24 FED FED will not apply to income from an office or employment which is: Chargeable under the remittance basis; Qualifies for the relief for key employees carrying on research and development activities (s472d TCA97); Qualifies for the split year residence relief (s822 TCA97); Qualifies for the cross border worker relief (s825a TCA97), or Qualifies for the new special assignee relief programme (s825c TCA97).

25 Overview of R&D Regime: R&D Tax Credits The Essentials Why R&D Tax Credits? Downside of favourable 12.5% CT Rate 12.5% CT deduction + 25% R&D Tax Credits = 37.5% tax benefit R&D Tax credits Available based on 25% of incremental qualifying R&D spend FY 2003 base year (note FA2012 change to first 100k of spend) Various developments in recent years: R&D tax credit increased from 20% to 25% Cash refunds for excess R&D credits from Irish Revenue Lobbying continues: Increase subcontracting limits Practical challenges of evidencing 2003 base year More accessible to SME s

26 R&D Utilisation of 25% credit Profitable Company Shelter Irish CT liability Excess can be refunded Loss-Making Company Carry back prior year Cash Refund of excess credits over 3 Years (subject to limit re CT liability in prior 10 years / Payroll liabilities in the period and prior period) Time limit 12 months after the end of the accounting period in which the expenditure is incurred.

27 R&D Subcontracting costs FA 2012 Limit on outsourced spend amended to the greater of: Up to 5%/10% of R&D expenditure outsourced to universities/third parties, or 100,000 (as matched by the company s own R&D spend) Note: Revenue feedback on claims have indicated that in some cases the 3 rd party or university / institute were in fact not carrying on R&D activities but rather providing support to the claimant company Grants R&D credit is net of grants received

28 R&D Two tests must be satisfied: Science Test: Qualifying R&D? R&D Accounting test: Are the costs relating to qualifying R&D activity?

29 R&D Science Test: R&D activities means: 1. Systematic, investigative or experimental activities, 2. In a field of science or technology, 3. Being one or more of the following categories of R&D: Basic Research specific objective) (experimental/theoretical work without a Applied Research (work undertaken for a specific objective); or Experimental Development (producing new/improved materials, products, devices, process, tools, systems or services) Guidelines &Legislation:

30 R&D Accounting Test: Staff costs and overheads attributable to R&D activities, including: Salaries of R&D personnel Indirect supporting activities Ancillary activities Plant and machinery Third party royalties

31 R&D Qualifying Direct Costs: Direct staff costs Raw Materials Direct overheads Plant & machinery Fixtures & fittings Computer software & hardware costs Sub-contracted R&D costs (subject to restrictions previously discussed) Buildings (special improved rules apply)

32 R&D Qualifying Indirect Costs: Rent Rates Heat Security Light Travel Administrative staff Senior staff Insurance Other N.B. Apportionment Method Used

33 R&D Non qualifying expenditure: Market research, market testing, market development, sales promotion Routine testing & analysis for the purposes of quality or quantity control Software fault reporting Bug fixing Alterations of a cosmetic or stylistic nature to existing products, services, or processes whether or not these alterations represent some improvement Legal & administration work in connection with patent applications, records and litigation

34 R&D FA Amendments Partial volume basis (first 100,000 irrespective of 2003 base) Outsourcing limits Rewarding of key employees by transferring R&D credit to employee to reduce his/her tax liability Key employees are defined as employees who: Performed 75% of their duties in the conception or creation of new knowledge, products, methods and systems in the relevant accounting period; and 75% of the cost of employment qualify as R&D expenditure; and Excluding directors and individuals holding more than 5% of the shares of the company or an associated company Cannot reduce the employee s effective tax rate below 23%

35 R&D Revenue feedback on types of errors Scientific test - substantially correct Accounting test - problematic Definite time-line Over-estimation of time/resources allocated Lack of timely records and documentation Outsourcing issue that many providing support services rather than R&D, records and documentation. Revenue Self-Review Questionnaire

36 R&D Our Experience with Revenue Queries: Volume of Revenue Queries Likely future trends: Ensure supporting documentation in place Ensure qualifying costs captured appropriately More use of external technical experts Focus on commencement/cessation dates for R&D

37 Presenter Details Presenter: Mark Barrett, Tax Partner, Moore Stephens Nathans Contact Details: Tel: +353 (0)

38 Thank You