2014 Number 4 Finance Act 2014: Key Corporate Tax Measures 87 Finance Act 2014: Key Corporate Tax Measures Fiona Carney Senior Manager, PwC Introduction Finance Act 2014 was signed into law by the President on 23 December 2014. As anticipated, this Finance Act represents the most significant change in Irish corporate tax law in recent years, with the well-signalled changes to the corporate residence rules, coupled with the significant current (and proposed) enhancements to our intellectual property (IP) and research and development (R&D) offerings. This article considers these provisions, together with some other key corporation tax aspects of the Act. Research and Development Tax Credits: s26 The R&D tax credit regime previously operated on an incremental basis, meaning that the 25% tax credit was available on qualifying current-year expenditure only to the extent that it exceeded the qualifying R&D expenditure incurred in 2003 (known as the base year ). Section 26 FA 2014 provides for a complete removal of the base-year spend for the purposes of calculating the R&D tax credit available for accounting periods commencing on or after 1 January 2015. The section also includes a technical amendment to the provisions introduced in FA 2010 to provide flexibility to the base year where an R&D centre closes under certain specific circumstances. (This change impacts only on R&D tax claims made for accounting periods commencing before 1 January 2015.) The incremental basis had acted as a barrier to Ireland s attracting new R&D investment. The removal of the base year therefore represents the most significant enhancement made to the R&D tax credit regime to date. It should increase Ireland s cost competitiveness for R&D investment, particularly for long-standing companies that have been restricted by the incremental nature of the regime. This will allow such companies to re-establish themselves in Ireland as cost-effective R&D centres.
88 Finance Act 2014: Key Corporate Tax Measures Capital Allowances on Intangible Assets: s40 Section 40 FA 2014 introduces a number of enhancements to the existing regime for capital allowances on intangible assets. or indirectly and going concern in the context of the extension of the relief to customer lists. It will be interesting to see how this progresses. Firstly, s291a TCA 1997 ( Intangible Assets ) is amended as follows with effect for accounting periods beginning on or after 1 January 2015: The definition of specified intangible asset is extended to include customer lists. However, the acquisition of a customer list will qualify only to the extent that it is acquired otherwise than directly or indirectly in connection with the transfer of a business as a going concern. The cap on the aggregate capital allowance and related interest expense that can be claimed in any one accounting period has been increased from the current 80% of the related IP profits for the period to 100% of those profits. Secondly, s288 TCA 1997 ( Balancing Allowances and Balancing Charges ) is amended as respects any event as defined in sub-section (1) occurring on or after 23 October 2014 that gives rise to a balancing charge on a specified intangible asset. The amendments provide that: No balancing charge will arise where the event occurs more than 5 years after the beginning of the accounting period in which the asset was first acquired. (Previously, a clawback period of up to 15 years applied depending on when the expenditure was incurred.) Where the above event or any scheme or arrangement which includes that event results in a connected company incurring capital expenditure on the specified intangible asset and the capital allowances available to the acquirer would exceed the unclaimed capital allowances on the asset at the date of transfer, the capital allowances available to the acquirer are limited to those unclaimed capital allowances. The above measures are a welcome step forward in enhancing the Irish IP offering. However, the measures themselves are limited in their effectiveness. The increase in the cap on the tax deduction will enable many companies to access tax relief for qualifying spend on intangible assets over a shorter time period. There are concerns over the meaning and application of the terms directly Furthermore, there are some overall significant issues with the attractiveness of our current IP amortisation regime. The capital allowances will ultimately expire, making it difficult for companies to maintain a consistent effective tax rate on their IP profits in the longer term. It is hoped that the knowledge development box regime announced in the Budget will address these issues. Company Residence: s43 The Finance Act introduces amendments to the corporate tax residence rules contained in s23a TCA 1997 designed to address concerns about the double Irish structure. Section 40 FA 2014 introduces a number of enhancements to the existing regime for capital allowances on intangible assets. The amendments provide that an Irishincorporated company will be regarded as Irish tax resident. To ensure alignment with the treatment of company residence in double taxation agreements (DTAs), there is one exception to this incorporation rule. If, under the provisions of a DTA, an Irish-incorporated company is regarded as tax resident in another territory, the company will not be regarded as Irish tax resident. The amendments also clarify that a non Irish incorporated company that is managed and controlled in Ireland is not prevented from being regarded as Irish tax resident. The new provisions have effect from 1 January 2015 for companies incorporated on or after 1 January 2015. For companies incorporated before that date, the new provisions apply only from the earlier of either: 1 January 2021 or the date, after 1 January 2015, of a change in ownership of the company in circumstances where there is also a major change in the nature or conduct of the business of the company within the period that begins one year before the date of the change of ownership (or on 1 January 2015, whichever is later) and ends five years after that date. This means that all of the current corporate tax residence provisions contained in the legislation (including the stateless companies
2014 Number 4 Finance Act 2014: Key Corporate Tax Measures 89 provisions introduced in F(No. 2)A 2013) will continue to apply to companies incorporated before 1 January 2015 until 31 December 2020 at the latest. In the period to 31 December 2020, all groups will need to monitor carefully the corporate tax residence position of Irish-incorporated, non-resident companies that do not satisfy the exception contained in the new provisions. This includes, for example, considering the impact of any proposed mergers or acquisitions involving both a change in ownership and business changes/integration measures. Capital Gains Tax Degrouping Charge: s41 Section 623 TCA 1997 is amended to clarify the period in which tax becomes due and payable on a chargeable gain arising to a company that leaves a CGT group within 10 years of having acquired an asset from another company. Capital Allowances Energy-Efficient Assets: s38 Section 285A TCA 1997 provides for accelerated capital allowances for capital expenditure incurred on the provision of certain energy-efficient equipment for the purposes of a company s trade. The scheme effectively allows full tax relief for qualifying expenditure in the first year in which the asset qualifies for capital allowances. Section 623 TCA 1997 is amended to clarify the period in which tax becomes due and payable on a chargeable gain arising to a company that leaves a CGT group within 10 years of having acquired an asset from another company. The scheme was due to expire on 31 December 2014. Section 38 FA 2014 extends the scheme to 31 December 2017. In addition, the descriptions of the 10 classes of technology within which assets may qualify under the scheme are amended to keep pace with technological developments in the field. Both of these measures will be welcomed by suppliers and purchasers of green plant and machinery. Any tax payable on a chargeable gain arising on the earlier intragroup transfer (which was previously deferred) is treated as due and payable in respect of the accounting period in which the company leaves the group. The rate of tax applying to the disposal is the rate that applied at the time of the original intra-group transfer. Capital Gains Tax Closely Held Groups: s44 Section 590 TCA 1997 provides that, if a non Irish resident company (which would be a close company if it were Irish resident) disposes of certain assets, the gain arising can be attributed back to Irish-resident participators in the company, both individuals and companies. In the case of an asset comprising shares in another company, the substantial shareholdings relief (SSR) provisions contained in s626b TCA 1997 can apply to exempt the gain if the relevant conditions are met. Section 44 FA 2014 amends s626b TCA 1997 to prevent the SSR provisions from exempting the gain in the hands of a non-corporate participator. The position remains unchanged where the participator is a company. The amendment applies to disposals made on or after 18 November 2014. Capital Allowances Aviation Services: s33 Finance Act 2013 introduced provisions to grant industrial buildings allowances on capital expenditure incurred on the construction of buildings or structures employed in a trade that consists of the maintenance, repair or overhaul of commercial aircraft or the dismantling of commercial aircraft for the purpose of salvaging or recycling parts or materials. Section 33 FA 2014 provides that the allowances will be available only to enterprises that construct qualifying buildings in regionally assisted areas and comply with EU Regional Aid Guidelines. Certain information must also be provided to Revenue before making any claim for allowances. The commencement of the relief remains subject to Ministerial Order. Relief for Start-Up Companies: s39 Section 486C TCA 1997 provides for relief from corporation tax on trading income for new companies in the first three years of trading. The relief takes the form of a reduction in the corporation tax liability relating to the new trade (including chargeable gains on assets used in the trade) and is capped at the amount of the employer s PRSI contributions paid by the company in the relevant accounting
90 Finance Act 2014: Key Corporate Tax Measures period. The corporation tax liability relating to the new trade can reduce to nil where that liability does not exceed 40,000, subject to any restriction imposed by the cap. Marginal relief applies where the corporation tax liability is between 40,000 and 60,000. The relief previously applied only to trades set up and commenced by a new company in the period from 1 January 2009 to 31 December 2014. Section 39 FA 2014 extends this period to 31 December 2015. The Minister has also indicated that a review of the operation of the measure will take place in 2015. Taxation of Short-Term Leases of Plant and Machinery: s36 Section 80A TCA 1997 contains special provisions relating to the taxation of short-term leases of plant and machinery. Broadly, certain lessors can elect to claim tax relief on the cost of acquiring short-life assets in line with accounting depreciation rather than under the normal capital allowance provisions. Up to 2010, only finance lessors could benefit from s80a TCA 1997. Finance Act 2010 extended the section to operating lease portfolios. The extension was designed to apply to new operating lease portfolios, and a limitation applied to existing asset portfolios. In effect, the deduction available for existing portfolios could not exceed the capital allowances claimed in the period immediately before the extension of the regime. Section 36 FA 2014 removes this limitation for accounting periods ending on or after 1 January 2015, meaning that the amount deductible will instead be set at the accounting depreciation charge for the period. This should bring parity to the treatment of operating lessors established before and after 2010. Accounting Standards: s42 Section 42 FA 2014 amends Schedule 17A TCA 1997. This schedule provides transitional rules for tax purposes for companies that make certain changes to the accounting standards under which they prepare their accounts defined as moving from preparing accounts in accordance with standards other than relevant accounting standards to preparing accounts in accordance with relevant accounting standards. This currently covers the transition from Irish GAAP to IFRS. The rules seek to ensure that no items of trading income or deductible trading expenses that would be taken into account in computing profits in accordance with relevant accounting standards are either double-counted or fall entirely out of the charge to tax. The net transitional adjustment as computed is treated as a trading receipt or a deductible trading expense for tax purposes. The adjustment is required to be spread over a five-year period starting in the first accounting period in which the company begins to prepare its accounts in accordance with relevant accounting standards. Specific computational rules apply to bad debts and financial instruments. Revenue had previously confirmed the view that the definition of relevant accounting standards included FRS 101 and that the transitional rules covered a move from Irish GAAP to FRS 101. Section 42 FA 2014 is intended to amend the definition to cover FRS 102. However, there is an element of doubt over whether FRS 102 is in fact within the revised definition of relevant accounting standards, and further clarity is being sought from Revenue in this regard. While this is the clear intent of the amendment, whether it is achieved is open to debate. The amendment applies to any accounting period beginning on or after 1 January 2015. For companies that adopt FRS 102 from 2015 onward, the net transitional adjustment should therefore be taxable/deductible over five years. Questions have been raised regarding the precise application of the provisions for any companies that adopt FRS 102 in an earlier accounting period. The Guidance Notes issued by Revenue state that the transition rules contained in the Schedule will be applied administratively as appropriate to early adopters. Real Estate Investment Trusts: s29 Section 29 FA 2014 introduces a number of amendments to the Irish real estate investment trust (REIT) regime. Firstly, if chargeable assets are transferred to a REIT, this typically crystallises a CGT charge for the transferor. Section 29 FA 2014 amends s617 TCA 1997 to ensure that this charge arises for the transferor even where the transferor and the REIT are part of the same Irish CGT group. The amendment provides that a REIT or a member of a group REIT cannot be a transferee company for the purposes of CGT group relief for any disposals occurring on or after 23 October 2014. Secondly, the Finance Act introduces a DIRT exemption for deposits of a REIT or group REIT. This should ensure that the current exemption for profits from the investment of cash raised by the
2014 Number 4 Finance Act 2014: Key Corporate Tax Measures 91 issue of ordinary shares or the sale of rental properties for a period of 24 months operates as intended. Finally, the Finance Act provides that the principal REIT must notify Revenue on each occasion that a new company is added to the REIT group within 30 days of that date. Compliance and Administrative Matters The Finance Act introduces a number of amendments to compliance obligations and administrative matters contained in Parts 38 and 48 of TCA 1997, including the following. Record retention period Section 886 TCA 1997 requires taxpayers to keep certain records and other documentation for a specified time period, generally six years. The requirements apply to persons chargeable to tax under Schedule D or Schedule F in respect of any trade, activity or other source of income or chargeable to CGT in respect of chargeable gains. The records to be retained are those that are necessary to enable correct returns to be made on those profits or gains. Finance Act 2014 extends the retention period for records and documents in cases where an inquiry, investigation, appeal, judicial process or claim is ongoing. The records must be held until such time as the inquiry, investigation, appeal, judicial process or claim is concluded and the time limits for instigating further appeals or proceedings have expired. Tax clearance and e-filing The Finance Act provides for the introduction of an electronic tax clearance system to improve the efficiency and effectiveness of the existing tax clearance process. The tax compliance status of taxpayers may be reviewed by Revenue on an ongoing basis, and tax clearance certificates previously issued may be rescinded depending on the taxpayer s current tax compliance status. The new tax clearance procedures will come into operation by Ministerial Order. Amendments are also made to the e-filing and self-assessment provisions to bring them up to date with the current requirement to submit accounting information in electronic format when filing the tax return. Anti-Avoidance Provisions: s87 Section 87 FA 2014 amends the general anti-avoidance rules to (a) provide that the existing s811 and s811a TCA 1997 apply only to transactions commenced on or before 23 October 2014 and (b) to introduce s811c and s811d TCA 1997, applying to transactions commenced after that date. While a detailed analysis of the new provisions is outside of the scope of this article, there are a number of noteworthy aspects to the new provisions that merit comment. Transitional provisions are added to s811a TCA 1997 to provide a mini-amnesty for transactions entered into on or before 23 October 2014. Where a taxpayer makes a full disclosure to Revenue with full payment of tax and interest due on or before 30 June 2015, the taxpayer will not be subject to the surcharge provided for in sub-section (2) and any interest payable will be reduced by 20%. Finance Act 2014 extends the retention period for records and documents in cases where an inquiry, investigation, appeal, judicial process or claim is ongoing. The new s811c TCA 1997, applying to transactions commenced after 23 October 2014, is significantly different from the existing provisions in a number of respects. Under the existing provisions, it is necessary for a nominated officer to form the opinion that a transaction is a tax-avoidance transaction such that the tax advantage could be withdrawn. The new section permits any officer of the Revenue Commissioners to withdraw the tax advantage. The requirement for the officer to form the opinion is also scaled back to its being reasonable to consider that a transaction is a tax-avoidance transaction. No guidance has been provided by Revenue to date in relation to the interpretation of the term reasonable to consider. Although reasonableness tests are included in the anti-avoidance rules in other jurisdictions such as the UK and Canada, there are sufficient contrasts between these tests and the new Irish provisions to make it difficult to draw analogies. We await clarification on this point. Revenue Sanctions: s94 Section 1084 TCA 1997 ( Surcharge for Late Returns ) is amended to provide that a taxpayer will be liable to a surcharge where the taxpayer deliberately or carelessly submits a timely but incorrect return and does not rectify the error before the return filing deadline. However, this surcharge will not be applied where the taxpayer pays the full amount of any penalty due for making the incorrect return.
92 Finance Act 2014: Key Corporate Tax Measures The section is also amended to substitute the terms deliberately and carelessly for the terms fraudulently and negligently where relevant. This update brings the terms into line with those currently used in the penalty provisions. The amendments are effective for returns delivered on or after the date of the passing of the Finance Act. Conclusion The corporate tax measures introduced in the Finance Act are broadly positive for companies doing business in Ireland. The improvements to the tax incentives for IP and R&D activities demonstrate the Government s commitment to enhancing our offering in this area. Coupled with this, other non-corporate tax measures such as the extension of both the Special Assignee Relief Programme (SARP) and the Foreign Earnings Deduction (FED) should support Irish companies in attracting and maintaining senior talent. and should provide certainty to existing FDI investors. However, groups will need to monitor the corporate residence status of these companies carefully for the duration of the transitional period. Disappointment has been expressed by those in the private business sector that the Finance Act did not go further in addressing their wish list, including measures to assist with an increasing cost base, the ability to raise finance, and the ability to attract, retain and reward key talent. The Finance Act does contain some positive measures in these areas, including those outlined above, together with enhancements to the Employment and Investment Incentive and CGT entrepreneur relief. However, while the changes are welcome, there continue to be some drawbacks to the attractiveness of these incentives for investors. Read more on Finance Bill Tour Notes 2014; coming soon to FINAK Finance Act 2014 Explained The changes to the corporate residence provisions were well signalled. The transitional rules for existing companies are welcome