Wednesday, October 22, 2014
Last week the Irish Government delivered its Budget which has a number of significant measures relating to companies incorporating or already established in Ireland. These changes are important in laying the foundations for Ireland’s continued competitive edge; while also clarifying a number of historic issues. The Budget was also delivered in the context of the on-going international focus on the tax issues of global trade and in particular the OECD’s Base Erosion and Profit Shifting (“BEPS”) project.
The core objective for Ireland is to continue to have an attractive, compliant, transparent and accessible regime thereby ensuring it remains one of the top destinations in the world for inward investment. Budget 2015 goes some way in setting this objective in motion.
In repeating the policy statement iterated at the beginning of the Department of Finance’s recent Public Consultation Paper on BEPS in May of this year, Mr. Noonan stated Ireland’s corporate tax regime has three key elements: rate, regime and reputation.
Budget 2015 has been formulated in line with these three core elements and has reinforced or introduced a number of key changes and enhancements designed to ensure Ireland has an attractive and transparent corporate tax regime.
1. Corporate tax rate
The 12.5% corporate tax rate is a resolutely settled policy, with a clear message being conveyed:
“The 12.5% tax rate never has been and never will be up for discussion. The 12.5% tax rate is settled policy. It will not change.”Minister Noonan, Budget Speech 2015, Dáil Ēireann, 14 October 2014
Despite much commentary on Ireland’s corporate tax rate, it will remain unchanged and internationally this now appears accepted. Indeed the publication by the OECD of the first seven BEPS recommendations in September has added further certainty, with the Action 5: Countering Harmful Tax Practices Report in particular acknowledging that countries are free to set their own tax rates.
2. Further enhancements
The Budget highlighted that the aim is for Irish tax rules to be fair but also focused on securing foreign direct investment. The adaptability and evolutionary nature of the system was certainly highlighted last week with a clear road-map paved for the sustained provision of a tax environment conducive to inward investment and, in-turn, economic growth.
Some of the budget provisions and intended action items are as follows:-
2.1 Intellectual Property: Knowledge Development Box
In line with international trends, there is now a clear intention of further enhancing Ireland as an attractive destination for the development of intangible assets. The exact nature of this regime will develop in the coming months; however it is to be an income based regime which will provide and on-going competitive effective tax rate. In addition the current capital allowances regime for expenditure on intangible assets is set to be enhanced with the current cap removed and the definition of ‘specified intangible assets’ extended. .
2.2 Research and Development:
Ireland has a generous regime allowing a credit on a wide range of R&D expenditure. The current rules are set to be enhanced with the delivery of a previously stated intention in last year’s budget, namely the removal of the current ‘2003 base-year limitation’. Furthermore the Revenue Commissioners are to publish new guidelines bringing clarity as to the operation of the credit and increasing the areas where the credit can be claimed..
2.3 Special Assignee Relief Programme (SARP):
The SARP programme which reduces the tax rate of certain foreign based executives who are assigned to Ireland has been extended to 2017 and will be improved. The relief in its basic form allows, subject to certain conditions, an income tax relief for individuals arriving in Ireland to work. The level amount of the relief is 30% of the individual’s income between the lower threshold of €75,000 and the upper threshold of €500,000.
Although the final details are yet to be published, the following improvements have been indicated:
2.4 The diversification and improved access to Export Markets:
The current ‘Foreign Earnings Deduction tax regime’ will also be extended for a further three years. This relief operates so as to provide a reduction in taxable employment income for individuals who spend time working overseas. It provides for a reduction in taxable employment income in proportion to the time spent working overseas, subject to a maximum yearly deduction of €35,000.
In addition to extending the regime, there were also a number of changes specified, allowing Irish businesses further access to foreign export markets:
Each element of the corporate tax regime has been and continues to be formulated in order to sustain a stable and competitive environment reassuring multinational corporations around the world. In addition, the policy is designed to strengthen a transparent but competitive tax regime ahead of and in the spirit of BEPS, and indeed in line with Ireland’s own three key elements.
3. Other changes/enhancements
Central to Ireland’s competitive tax regime is its ability to keep pace with international tax standards, as well as continuing to maintain its position as the country of choice for foreign direct investment. In addition to the changes above, other points noted in the Budget which are relevant for those who have or intend to invest in Ireland are the following announcements.
3.1 Double Tax Treaties
Ireland has signed 71 comprehensive double tax agreements, of which 68 are in effect. In the furthered enhancement of this extensive tax agreement network, Ireland is set to continue to initiate negotiations and sign new agreements with other countries. The Government has confirmed its intention to continue to expand the list as a priority..
3.2 Tax Residence Rules
A further widely publicised change is to the company tax residence rules. Any Irish incorporated company will be deemed resident in Ireland, subject to transitional rules, from 1 January 2015. In effect this change will alter what has been termed the Double Irish.
As and from 1 January 2015 all new companies incorporated in Ireland will automatically be treated as tax resident in Ireland, unless regarded as resident in a territory other than Ireland for the purposes of a tax treaty. There will however be a transitional period for existing companies. The transitional period will be confirmed in the Finance Bill however it has been indicated that it will be the end of 2020. In light of international tax movements, most specifically the BEPS project referred to above, this change provides and will provide international commercial entities stability and certainty as countries across the globe reflect on OECD recommendations.
Budget 2015 is intended to ensure that Ireland will remain stable, efficient and an economically sensible location to do business. In addition, for commercial enterprises within the jurisdiction or for those intending to locate here, the clear statement of the 12.5% rate and commitment to encourage development and research in Ireland will encourage investors, companies and employees alike.
As the world famous tycoon Henry Ford once stated:
“You can’t build a reputation on what you are going to do”