FINANCE BILL 2016 HEADLINES 20 OCTOBER 2016 Table of Contents INCOME TAX... 2 BUSINESS TAXATION... 3 PROPERTY... 3 SECTION 110 & PROPERTY FUNDS... 4 INDIRECT TAX... 5 CAPITAL ACQUISITION TAX... 6 AGRICULTURE & FISHING... 6 COMPLIANCE MEASURES... 7
Income Tax The Bill contains provisions to enact the changes to tax rates announced by the Minister in his Budget speech. Universal Social Charge The Universal Social Charge (USC) is to be dropped by 0.5% for the 3 lower bands - down to 0.5%, 2.5% and 5% with effect from 1 January 2017. Incomes of 13,000 or less are exempt from USC and there is an increase to the ceiling of the band on which the reduced 2.5% rate of USC will be payable, from 18,668 to 18,772. The revised rates will be: Income up to 12,012 Rate reduced from 1% to 0.5% Income from 12,013 to 18,772 Rate reduced from 3% to 2.5% Income from 18,773 to 70,044 Rate reduced from 5.5% to 5% Income from 70,045 to 100,000 Rate unchanged @ 8% PAYE income in excess of 100,000 Rate unchanged @ 8% Self-employed income in excess of 100,000 Rate unchanged @ 11%. Medical card holders and individuals aged 70 years and over whose aggregate income does not exceed 60,000 will now pay a maximum USC rate of 2.5%. Self employed As announced in the Budget, the Bill increases the tax credit for self-employed individuals from 550 to 950. Home Carers The Bill increases the home carer's tax credit by 100 to 1,100. SARP & FED The Bill extends the Special Assignee Relief Programme ("SARP") and Foreign Earnings Deduction ("FED") to 2020. A change is being made to FED to reduce the foreign work days required from 40 to 30 and to extend it to cover Columbia and Pakistan. Relief for long-term unemployed The relief available for long-term unemployed individuals starting a business has been extended by 2 years to 31 Dec 2018. Rent-a-room relief The limit on which rent-a-room relief can be claimed will be increased by 2,000 to 14,000. This will allow individuals rent a room in their home and, provided the income does not exceed 14,000, such income will be exempt from income tax. 2 P age
DIRT As announced in the Budget, the current DIRT rate of 41% will decrease by 2% per annum for the next 4 years, commencing on 1 January 2017. From 2020 onwards the rate will be 33%. PRSA Anti-avoidance measures have been proposed which will apply to Personal Retirement Savings Accounts (PRSAs). This will result in benefits being deemed to be taken by the owner of the PRSA on the later of reaching 75 years of age, or the date of the passing of the Finance Act. Business Taxation Entrepreneur Relief The Bill confirms the Budget Day announcement that a 10% rate will apply for disposals qualifying for entrepreneur relief. The new rate will apply to disposals made on or after 1 January 2017. Employment and Investment Incentive (EII) The Employment and Investment Incentive (EII) will be removed from the high-earners restriction for share subscriptions made on or after 1 January 2017. Amendments also allow Revenue to continue to publish certain information about companies who raise funds under EII. Country by country reporting Finance Act 2015 introduced into Irish law the OECD Base Erosion and Profit Shifting (BEPS) project recommendations for Country-by-country Reporting. Subsequently an EU Council Directive was agreed at EU level as regards mandatory automatic exchange of information. This Finance Bill contains provisions to bring the Irish legislation in line with the Directive. The also makes a number of minor amendments to the Irish Country by Country reporting requirements. Bank levy In Budget 2016, it was announced that there would be an extension of the bank levy from 2016 to 2021 and that a new basis for calculating the levy would be introduced. The Bill provides details of the new methodology which will apply from 2017 and also provides that the levy is being charged at a higher rate of 59% (from 35% currently) for the year 2017 and subsequent years. Capital allowances for energy-efficient equipment Certain energy-efficient equipment can qualify for 100% capital allowances in year 1. This relief is currently only available to companies, but the Bill proposes to extend this to non-incorporated persons, such as sole traders. Property Help to Buy There are 12 pages of detailed provisions relating to the Help-to-Buy scheme that was announced in the Budget. It is to be introduced to help first time buyers acquire newly built houses. A rebate will be available for income tax (including DIRT) paid over the last 4 years, up to a maximum of 5% of the purchase price up to 400,000 or the value of a self-build up to the same value. Relief is available for new houses up to 600,000, with no relief available for houses above this amount. The maximum benefit is 20,000 and it applies to homes purchased from 19 July 2016 until 31 December 2019. A mortgage from a qualifying lender of a minimum of 70% loan to value is required to be eligible for the rebate. Where more than one person is involved in a purchase, each person 3
must be a first-time purchaser. The Bill contains procedural obligations for claimants including the obligation to obtain a tax clearance certificate. The Bill contains provisions for the registration of contractors with the Revenue Commissioners for participation in the incentive and for clawback provisions in certain circumstances. Claims for 2016 will be paid directly to the claimant whereas claims for subsequent years will be channelled to either the qualifying contractor or qualifying loan bank account of the claimant. There are clawback provisions if the residence ceases to be occupied by the claimant within 5 years. It is a full clawback if the cessation is in year one, but drops by 20% per annum if in subsequent years. There are also clawback provisions for self-builds that are not completed within 2 years of a claim. Rental deductions for interest In calculating rental income, the deduction for interest on borrowings relating to residential premises is currently restricted to 75%. As announced in the Budget, this restriction will be unwound by 5% per annum over a 5 year period, commencing on 1 January 2017. As such, a full deduction should be available from 1 January 2021 onwards. Home Renovation Incentive The Bill confirms that the Home Renovation Incentive is being extended until 31 December 2018. The Incentive provides for tax relief by way of an Income Tax credit at 13.5% of qualifying expenditure on repair, renovation or improvement works carried out on a main home or rental property by qualifying Contractors. Living City Initiative The Living City Initiative, which came into force in May 2015, will be updated. The key changes are: The relief is extended to lessors of residential houses; For residential houses, the requirement for the building to have been originally constructed for use as a dwelling will be removed; For residential houses, the floor area requirements (between 38 and 210 sq m) will be removed Qualifying expenditure must exceed 5,000 (currently it must exceed 10% of the market value of the building); and Those who receive State grants are no longer excluded from the Scheme, but their relief will be reduced. Section 110 & Property Funds Section 110 Securitisation Regime The Bill introduces new rules that apply to the extent that a qualifying Section 110 securitisation vehicle ( Section 110 Company ) holds and/or manages specified mortgages, broadly loans (and swaps or similar derivatives) relating to Irish property. The changes do not however encroach on bona fide securitisations such as collateral loan obligations, commercial and residential mortgage backed securities and loan origination businesses. The Bill provides that the interest paid by a Section 110 Company on profit participating loans ( PPLs ) relating to its specified mortgages may no longer be fully deductible in calculating its taxable profits, unless Irish withholding tax has been deducted or it has been paid to: An individual within the charge to Irish income tax or a company within the charge to Irish corporation tax 4 P age
An Irish or EEA pension fund, or An EEA national or company who will pay tax on receipt of the interest, without any deduction for PPL or notional/imputed deemed interest expense, provided that the payment of the coupon to the EEA national or company is not for tax avoidance purposes and, if the recipient is a company, it must carry on genuine economic activities in an EEA state. Where the above conditions are not met, the interest deduction will be restricted to the amount of interest that would have been payable on the loan (at the time of the creation of the PPL) as would represent a reasonable commercial return which is not dependent on the results of the Section 110 Company. The definition of specified mortgages includes both: i. A loan that derives the greater part of its value from land in the State (directly or indirectly), or ii. A swap or similar derivative that derives the greater part of its value from land in the State (directly or indirectly) or a loan to which (i) applies The Bill also reduces the timescale within which a company must inform the Revenue Commissioners in writing of its intention to be a Section 110 Company to within 8 weeks of acquiring qualifying assets of 10 million, or where the information requested is not available at that time, without undue delay. The matters to be disclosed to the Revenue have been expanded and, in addition to the type of transaction, additional detail must be provided as to the assets acquired, name of the originator, intragroup transactions and connected parties. The amendments apply to accounting periods commencing on or after 6 September 2016. To the extent an accounting period straddles that date, it shall be divided into 2 parts. The Bill does not permit a Section 110 Company to mark to market or revalue their assets on 5 September 2016. Irish Real Estate Funds The Bill provides for a tax regime for a new classification of fund, Irish Real Estate Funds ( IREFs ). IREFs are investment undertakings (excluding UCITS) where 25% of the value of that undertaking is made up of Irish real estate assets. This proposal is targeted at ensuring that the Irish tax base will be protected where Irish property transactions are taking place within collective investment vehicles. IREFs must deduct a 20% withholding tax on certain property distributions to non-resident investors. Broadly speaking, property distributions are payments (both distributions and redemptions) made to unit holders who are not within the charge to Irish tax, out of profits arising from its Irish land. The withholding tax will not apply to certain categories of investors such as pension funds, life assurance companies and other collective investment undertakings. The provisions will apply to accounting periods beginning on or after 1 January 2017. However, the provisions will apply for accounting periods commencing on or after 20 October 2016 where an IREF makes a decision to change its accounting period on or after 20 October 2016 in order to defer the application of the new regime. Indirect Tax VAT The Bill contains amendments to the provisions in relation to apportionment of VAT on general overheads. The amendments provide that the turnover method is the primary method of apportionment but where that method does not correctly reflect the taxable use of dual-use inputs, an alternative method of apportionment should be used. Its purpose is to align Irish VAT legislation with the EU VAT Directive. Any partially exempt entities should consider the appropriateness of their existing VAT rate methodologies. The Bill confirms the Budget increase in the flat rate addition payable to farmers who are not VAT registered from 5.2% to 5.4% with effect from 1 January 2017. The Bill also includes a measure 5
which gives the Minister the power to make an order to provide that the flat rate addition payment will not be applicable in respect of specific agricultural activities in certain circumstances. Excise The Bill confirms the Budget increases in the rates of Tobacco Products Tax which, when VAT is included, amount to 50 cent on a pack of 20 cigarettes in the most popular price category with prorata increases on other tobacco products. The Bill confirms the Budget increase to the production threshold for eligibility to claim the reduced rate of Alcohol Products Tax for beer brewed in small breweries. The production threshold is raised to 40,000 hectolitres per annum, relief is granted up to 30,000 hectolitres per annum. The Bill includes a range of measures relating to the extension and amendment of Natural Gas Carbon Tax, Mineral Oil Tax and Excise Duty provisions. The Bill includes a measure to extend the VRT relief for hybrid electric vehicles until 31 December 2018 and for electric vehicles until 31 December 2021. Capital Acquisition Tax The Bill confirms the increases to the tax free thresholds that apply for capital acquisitions tax purposes as announced in the Budget. The new thresholds apply to gifts and inheritances taken on or after 12 October 2016 and are: Category A Threshold (children): Increase by 30,000 to 310,000 Category B Threshold (relatives): Increase by 8% to 32,500 Category C Threshold (unrelated): Increase by 8% to 16,250. Agriculture & Fishing Income averaging for farmers As announced in the Budget, the income averaging regime for farmers will be updated. For the tax year 2016 onwards, farmers will now have the option to elect out of the regime for a single year and to instead be taxed on the income in that year. The additional tax which would have arisen had the farmer remained in the income averaging regime is payable in equal instalments over a 4 year period. Farm Restructuring CGT Relief The Bill amends the existing CGT relief for farm restructuring. When originally brought in the requirement was that the first transaction in the restructuring (e.g. sale, purchase, or exchange of land) should be carried out on or before 31 December 2016, with each transaction in the restructuring completed within 24 months. The Bill extends the deadline for the completion of the first restructuring transaction to 31 December 2019. The amendment will come into effect by way of a Commencement Order made by the Minister of Finance. Fishermen The Fishermen Income Tax Credit of 1,270 that was announced in the Budget is introduced with the condition that qualifying fishermen must spend at least 80 days per year at sea engaged in seafishing. There are some specific provisions about the type of fishing activity that can qualify. Decommissioning of fishing vessels Currently where payments are made under the scheme for compensation in respect of the decommissioning of fishing vessels, then the balancing charge which arises for capital allowances 6 P age
purposes on fishing vessels is spread over a 5 year period. The Bill proposes to extend this relief to the latest EU vessel decommissioning scheme. This update is subject to a Commencement Order. Compliance Measures Offshore tax defaulters With effect from 1 May 2017, the opportunity to make a voluntary disclosure in relation to a tax default will be withdrawn from taxpayers whose liabilities involve offshore matters, which broadly means any offshore tax defaults. Any such person failing to make a disclosure before that date will no longer have access to the penalty mitigation arrangements and protection from publication and criminal prosecution currently available where a qualifying disclosure is made. This restriction can also potentially apply to a disclosure in respect of any other tax defaults for such persons. Publication of names of tax defaulters The Bill also contains some amendments in relation to the rules for publication of tax defaulters. It clarifies that the portion of the settlement sum relating to a valid qualifying disclosure will be excluded from publication and only the portion of the settlement in respect of other matters will be published. The Bill also provides for distinguishing in the published defaulters list between defaulters who have paid and those who have failed to pay the settlement sum. Finally, the Bill amends the mandatory requirement that the Minister increase the publication limit for default (currently 33,000) every 5 years to a discretionary requirement. Revenue information sharing requirements Under an EU directive, Revenue are required to exchange certain information in relation to advance cross border rulings and advance pricing arrangements with other EU member states and the European Commission. The Bill contains provisions which set out the type of additional information which may be exchanged under the directive. Non-resident trusts Irish tax law contains anti-avoidance provisions which are designed to prevent individuals avoiding capital gains tax through the use of non-resident trusts. Amendments have been introduced in the Bill which are intended to deal with concerns as to whether those provisions are compatible with EU law. As a result, the anti-avoidance rules will not apply to a gain accruing on the disposal of assets where it is shown to the satisfaction of the Revenue Commissioners that the trusts were 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 Capital Gains Tax. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Produced by: KPMG s Marketing Department. Publication Date: October 2016. 2016 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. 7