www.pwc.ie/financeact

Getting the balance right? Finance Act 2015

December 2015 Table of contents Welcome

Joe Tynan +353 1 792 6399 [email protected]

The recent publication by the OECD of its From the perspective of indigenous final BEPS papers is a reminder of the business the incentives for entrepreneurs context in which Finance Bill 2015 was and the Knowledge Development Box drafted and the pace at which the global should encourage domestic business tax system continues to undergo growth. unprecedented change. There is a general The Finance Bill confirms the Budget move towards seeking better alignment announcement signalling an of taxing rights with substance and with improvement for the tax situation for this in mind, Ireland has sought to workers, particularly low to middle continue to position itself as being an income earners. The relatively high attractive jurisdiction with a tax system marginal rate of tax on income remains that is globally accepted as being open, in place for now. However, it is to be transparent, fair and competitive. welcomed that the position in relation to This ambition is demonstrated by the directors travelling expenses has now addition of the world’s first BEPS been clarified. compliant Knowledge Development Box Finance Bill 2015 demonstrates that the (KDB) to the existing suite of corporate BEPS era brings challenges to both tax tax measures, however the potency of policy makers and global businesses this new relief fell somewhat short of alike. However, it also presents expectations. The introduction of opportunities for countries such as legislation providing for Country by Ireland to put itself forward as an Country Reporting (CbCR) is likely to attractive proposition from which to do present challenges for multinational business on the global stage. groups with periods beginning from 1 January 2016 and early engagement is key.

3 Introduction

A new Petroleum Production Tax has been introduced for oil and gas exploration authorisations awarded on or after 18 June 2014. Combined with corporation tax, this effectively increases the maximum rate of tax payable on profits from productive fields from 40% to 55%. In addition, changes to be made to the Relevant Contracts Tax (RCT) provisions will broaden its scope to include work undertaken on the Irish Continental Shelf. This is a significant change which will Fiona Carney Stephen Ruane bring petroleum companies and +353 1 792 6095 +353 1 792 6692 companies in a range of other industries [email protected] [email protected] (such as telecommunications and offshore windfarms) that perform work on the Continental Shelf within the scope of RCT. The OECD recently published its final BEPS papers and the coming years will see a move to the implementation phase at This year’s Finance Bill is short but it does The measures brought in to assist country level. Ireland has engaged in this contain a number of significant measures entrepreneurs are consistent with the process at an early stage. To enhance the additional to those announced by Minister Government’s stated objective of transparency of the Irish tax system, and Noonan in last week’s Budget. promoting entrepreneurship. These in line with OECD recommendations, the measures include a decrease in the CGT Government has introduced Country by From a personal tax perspective, the rate from 33% to 20% for business Country Reporting (CbCR) obligations in principal changes are in the form of disposals. However, this is subject to a this Finance Bill, applying to Irish- adjustments to the USC thresholds and lifetime limit of €1 million which is far parented multinational groups with rates. Additional measures were included lower than similar incentives provided consolidated revenues of €750 million or in the Finance Bill to provide an exemption overseas. The Finance Bill also enacts the more. These provisions (together with the from USC for employees on employer commencement of measures previously wider OECD Transfer Pricing contributions to a PRSA, which is very announced in respect of the Enterprise Documentation requirements) will welcome news and brings the treatment of Investment Incentive Scheme to comply fundamentally change the way in which such contributions into line with employer with State Aid rules while also confirming multinational groups must document contributions to occupational pension that expansion works to existing nursing intercompany transactions and will create schemes. The Bill also provides for homes will qualify for relief under the a significant administrative burden for exemption from income tax, USC and PRSI scheme. The corporation tax relief for them. It will also contribute to the growing for vouched travel and subsistence start-up companies has also been extended trend towards the sharing of information expenses incurred by non-resident for a further three years. between tax authorities. non-executive directors attending meetings in their capacity as directors.

4 The Knowledge Development Box (KDB), The introduction of a provision specifying introduced in this Finance Bill, is the first who qualifies for the VAT exemption in and only innovation box in the OECD respect of educational services, and which region which is BEPS compliant. It enables Revenue to make a determination provides an effective 6.25% corporation that a specified educational activity should tax rate on profits arising from qualifying be subject to VAT where its exemption assets (including copyrighted software creates a distortion of competition, may and patented inventions) where some or add a further layer of uncertainty in an all of the related R&D is undertaken by the already complicated area. There has also Irish company. The regime is expected to been an extension of the VAT exemption be of most benefit to companies for certain bets and commissions in the undertaking significant R&D in Ireland. online gambling industry. The Finance Bill also contains a number of Overall, the Finance Bill contains anti-avoidance provisions which are measures which should stimulate the targeted at perceived abuses of existing domestic economy and which demonstrate legislative measures in the areas of Capital our ongoing policy of engagement with the Gains Tax and VAT. The measures include international tax agenda. the expansion of the existing “transfer of assets abroad” anti-avoidance legislation, a The Bill was amended in a number of new bona fide test for company respects prior to its enactment on 21 amalgamation or reconstruction relief and December 2015. The amendments measures altering the tax treatment of made are highlighted in dark red text restrictive covenant payments made to throughout this document. non-Irish residents. With regard to VAT, measures relating to the Capital Goods Scheme (“CGS”) are being introduced which will extend the connected party anti-avoidance rules under the CGS to include the supply of developed, but incomplete, immovable property. The inclusion of this provision will be seen as addressing a current gap in the legislation but what is not clear from the Finance Bill is whether the “stepping into the shoes” relief provision, which currently applies to the other CGS connected party anti- avoidance provisions, will be extended to this new provision.

5 Private Business

The Finance Bill includes more changes impacting on private businesses than were originally anticipated based on Budget Day announcements. The introduction of the Knowledge Development Box, changes to CGT Entrepreneur Relief, and the introduction of an earned tax credit for non-PAYE workers were well flagged welcome developments that will encourage entrepreneurship and assist private businesses in Ireland. The Bill also includes some technical adjustments to Film Relief and the expansion of the Employment and Investment Incentive Scheme. Finally, the Bill amends a number of existing anti-avoidance provisions (particularly concerning the area of CGT) in order to prevent perceived abuses of existing legislative measures that Private Businesses will need to be aware of.

Colm O’Callaghan Employment and Investment CGT Entrepreneur Relief +353 1 792 6126 Incentive (‘EII’) [email protected] The Bill revises the provisions of the The Finance Bill has the effect of enacting existing entrepreneur relief to introduce a the provisions included in Finance Act new reduced rate of Capital Gains Tax 2014 with respect to share issues made on (20%) which will apply to disposals of or after 13 October 2015. Broadly, these chargeable business assets from 1 January increase the annual and overall investment 2016 up to a lifetime limit of €1m. This is a limits for a company to €5million and welcome move from the Government; €15million respectively and extend the however, we would have liked to have seen required minimum holding period from 3 a higher cap. years to 4 years. The Bill also expands the Restrictions apply in order to ensure that availability of the relief to allow companies beneficiaries of the relief are genuine that already own and operate nursing business persons. A qualifying business for homes to raise funds for the purposes of the purposes of the relief excludes expanding their existing facilities. businesses which consist of the holding of The legislation contains new requirements investments, the holding of development for a qualifying company to meet certain land or the development or letting of land. conditions set out in the EU Regulations. The assets must have been owned for Any company which had received outline a continuous period of not less than approval for EII prior to 13 October 2015, 3 years in the 5 years immediately prior but had not raised EII funding by that date, to their disposal. Where the business is must now consider whether or not it is a carried on by a private company, an qualifying company under the amended individual holding no less than 5% of the scheme as the outline approval received shares in the company may qualify for the may no longer be valid. Existing relief. The individual must have been a companies, particularly those in existence director or employee of the company, for longer than 7 years, will need to spending not less than 50% of their consider the EU Regulations which working time in the service of the company underpin the new relief in more detail in a managerial or technical capacity for to determine if they are eligible. a continuous period of 3 years in the period of 5 years immediately prior to the disposal.

6 The relief can also apply to shares in a Attribution of income to Irish individuals assets. Revenue indicated in the eBrief that holding company whose business consists following a transfer of assets abroad the intention of the relief is to provide for a wholly or mainly of holding at least 51% The Finance Bill expands the remit of the deferral of the CGT liability as opposed to of the shares in one or more companies “transfers of assets abroad” anti-avoidance the elimination of the charge to tax arising carrying on a qualifying business legislation contained in Section 806 TCA on the ultimate disposal of the assets. They (a ‘qualifying group’). The individual 1997 so that it now also applies to non- also noted that where the relief was must have been a director or employee domiciled individuals who are chargeable claimed as part of a scheme to avoid CGT, as above of one or more members of to income tax on the remittance basis. the transactions may be challenged under the qualifying group. the general anti-avoidance provisions in This section is designed to counteract the legislation. Start Up Companies Relief schemes by individuals (resident or ordinarily resident in the State) who seek The Finance Bill now formally introduces This relief, which was due to expire at to avoid a liability to income tax by means a new anti-avoidance measure. The CGT the end of 2015, has been extended for a of transferring assets (usually income relief referred to above will not apply further 3 years such that it will apply to generating assets) overseas, the result of unless it can be shown that the new business start-ups which commence which is that income becomes payable to reconstruction or amalgamation is in 2016, 2017 and 2018. a non-resident (usually a non-resident effected for bona fide commercial reasons Earned Income Tax Credit corporate) while the resident individual and does not form part of an arrangement continues to retain the power to enjoy the main purpose or one of the main The Bill introduces legislation to enact the the income. purposes of which is the avoidance of tax. new earned income tax credit. The The change will apply to disposals made measure provides for a tax credit, capped Attribution of gains made overseas to Irish on or after 22 October 2015. at €550, which applies to an individual’s shareholders Restrictive covenants earned income i.e. income which does not Section 590 TCA 1997 enables Revenue qualify for the employee (PAYE) tax credit. attribute gains made on a disposal of The Finance Bill amends Section 541B Where an individual has employment assets by a non-resident company (which TCA 1997 which ensures that payments income also, the aggregate tax credits are is deemed to be closely held – i.e. broadly, made under restrictive covenant-type capped at €1,650. owned by 5 or fewer shareholders or arrangements (a payment in exchange for an individual accepting / agreeing to a Film Relief participators) to the company’s Irish resident shareholder(s). This has the restriction as to the conduct of their The Finance Bill has increased the effect of subjecting the Irish resident activities) are subject to CGT if they do not cap on qualifying eligible expenditure who controls the company to CGT on come within the scope of income tax. to €70million, together with making a the disposal made by the non-resident The amendment is aimed at circumstances number of technical amendments around company. whereby CGT is avoided on a payment the definition of ‘broadcaster’ for the The Finance Bill has now amended the made to a non-resident person in return for purposes of the relief and the level of section such that it will not apply to gains an Irish resident person entering into a information that needs to be disclosed where the disposal was made for ‘bona restrictive covenant. The chargeable gain to bring it in line with EU guidelines. fide’ commercial reasons. is now regarded as accruing to the Irish CAT resident person and not the non-resident Company reconstruction or amalgamation person with the result that it is subject to The Finance Bill legislates for an Currently, where a company is involved in Irish CGT. increase in the Group A tax free any scheme of reconstruction or threshold which applies primarily for amalgamation which involves the transfer gifts / inheritances from parents to their of the whole or part of a company’s children. The lifetime threshold has been business to another company (comprising increased from €225,000 to €280,000 for assets which are Irish chargeable assets), gifts and inheritances taken on or after relief is available which defers the Capital 14 October 2015. Gains Tax (CGT) liability until such time Anti-Avoidance that the assets are disposed of to an unconnected third party. Finally, the Finance Bill amended a number of existing anti-avoidance Revenue recently released eBrief 82/2015 provisions in order to prevent perceived which is aimed at countering the perceived abuses of existing legislative measures. In misuse of the section, in conjunction with particular a number of these may impact other provisions of the legislation, where Private Business. the relief is used as part of a scheme to avoid CGT on the ultimate disposal of the

7 Foreign Direct Investment (FDI)

Following on from Minister Noonan’s Budget 2016 announcement, the introduction of the Knowledge Development Box meets the standards of the OECD’s modified nexus approach and is the first fully compliant box in the world. The Knowledge Development Box provides for an effective 6.25% corporation tax rate to income arising from copyrighted software and patented inventions, where some or all of the related R&D is undertaken by an Irish company. The regime will be of most benefit to those companies that undertake significant R&D in Ireland.

Knowledge Development Box ‘Qualifying expenditure on qualifying Harry Harrison assets’ is a key driver of the calculation of The Finance Bill introduces the Knowledge +353 1 792 6646 the profits that qualify for the relief. The Development Box (KDB), a tax relief that [email protected] definition of this qualifying expenditure is will result in an effective 6.25% broadly aligned to the definition of corporation tax rate to certain profits ‘expenditure on research and arising from qualifying assets (including development’ for the purposes of the R&D copyrighted software and patented tax credit. In this regard, where a company inventions), for accounting periods which develops, improves or creates a qualifying commence on or after 1 January 2016. asset through qualifying R&D activities Qualifying profits on which the relief can and the company makes R&D tax credit be claimed are intended to reflect the claims in relation this, the expenditure proportion that the company’s R&D costs underpinning these claims should be bear to its overall expenditure on the broadly aligned to the ‘qualifying qualifying asset, with some tweaks to expenditure on qualifying assets’ for the reflect the agreed “Modified” nexus purposes of the relief. approach. The profits are calculated using There is an exception to the above in terms the following formula: of expenditure incurred by a company in engaging a third party to carry on R&D QE + UE x QA activities on behalf of the company. Payments made to such third parties are regarded as qualifying expenditure for the OE purposes of calculating the relief whereas Where: such payments are restricted for the QE is the qualifying expenditure on the purposes of the R&D tax credit. qualifying asset Qualifying expenditure is calculated by UE is the uplift expenditure reference to all qualifying expenditure on OE is the overall expenditure on the qualifying asset the qualifying asset incurred in the previous 4 years or, from 2020, all QA is the profit of the trade relating to the qualifying asset before taking qualifying expenditure incurred after 1 account of any allowance available January 2016. under this section

8 Costs outsourced to affiliates or costs Double tax agreements EU Parent Subsidiary Directive incurred on the acquisition of the IP are - Anti-Avoidance Measures The Taxes Consolidation Act 1997 includes not regarded as qualifying expenditure, a schedule which lists all the international Section 32 of the Finance Bill seeks to give however, such costs are allowed as “uplift double tax agreements and tax legal effect to recent changes made at EU expenditure” up to a combined maximum information exchange agreements entered level to the Parent Subsidiary Directive of 30% of qualifying expenditure. into by Ireland. which saw the introduction of an anti- The tax relief provides for an allowance of avoidance measure to the regime. The EU The schedule has been amended to (i) add 50% of the qualifying profits to be treated Parent Subsidiary Directive provides for a Ethiopia as a territory with which Ireland as a trading expense of the company, common system of taxation on dividends has a double tax agreement (ii) add new resulting in an effective 6.25% tax rate on received by parent companies from their double tax agreements with Pakistan and such profits. subsidiaries resident in other EU Member Zambia (iii) reflect a new Protocol to an States. Qualifying assets are to be treated existing double tax agreement with separately for the purposes of the KDB Germany and (iv) new tax information Generally speaking, the Directive requires calculations. However, if a number of exchange agreements with Argentina, the Member States to allow subsidiaries pay qualifying assets are so interlinked that it Bahamas and St Kitts & Nevis. dividends to their parent company free of would be impossible to provide a withholding tax. Furthermore, in order to The Finance Bill also includes an reasonable allocation of income and eliminate the double taxation of profits, amendment to enable arrangements to be expenses, then provision is made for using the Directive also provides for a tax credit entered into with a non-governmental a “family of assets” and treating the to be available to the parent company for representative authority for the purpose of combined assets as a qualifying asset. underlying taxes paid by the subsidiary on preventing double taxation and providing the profits out of which the dividend is Where an R&D tax credit claim has been for the exchange of information, subject to paid. utilised to shelter the corporation tax approval by Dáil Ėireann. liability of a company for the current and The recent amendment to the Directive at preceding accounting periods and an Capital gains tax for non- EU level saw the introduction of a General excess credit still remains, a claim for residents Anti-Avoidance Rule (GAAR) and Section monetisation of this excess credit can be Non-residents are generally only liable to 32 of the Finance Bill implements that made. The Finance Bill provides that the capital gains tax on the disposal of certain change. This brings Ireland in line with a KDB relief cannot increase the claim for specified assets. These include Irish land number of other EU Member States who monetisation of an excess R&D tax credit, and buildings, Irish mineral rights, have already adopted the changes into therefore, the relief cannot be taken into exploration and exploitation rights in the their domestic legislation. account for the purposes of the Continental Shelf and unquoted shares The proposed measure seeks to exclude monetisation calculations. deriving the greater part of their value dividends paid by subsidiaries resident in Where a company incurs a loss on the from these assets. The Finance Bill Ireland from the exemption from activities that qualify for the KDB relief, contains a provision to counter situations withholding tax under the Directive where the loss would be available on a value basis whereby prior to a sale by a non-resident, the payment forms part of an arrangement against other profits. cash is transferred to a company which or series of arrangements the main holds such specified assets (typically Irish purpose of which, or one of the main Scientific research land or buildings), so that at the time when purposes of which, is obtaining a tax the shares are disposed of less than 50% of The Finance Bill contains two technical advantage that defeats the object or the value of those shares are derived from amendments to allowances for capital purpose of the Directive and is not genuine specified assets. The effect of the provision expenditure on scientific research. The having regard to all the facts and is that, where the main purpose or one of first is to ensure assets are in use for the circumstances. An arrangement or series the main purposes of the transfer is the purposes of scientific research to qualify of arrangements will be regarded as not avoidance of tax, the value of the cash is for the allowances and the second provides genuine to the extent that it is not put into not taken into account in determining that capital allowances cannot also be place for valid commercial reasons which whether the shares derive the greater part claimed on the same expenditure under reflect economic reality. of their value from specified assets. The any other section. amendment applies to disposals made on Similarly, the entitlement under the or after 22 October 2015. Directive to underlying tax credit on dividends received by the parent is also withdrawn where the dividend is received as part of any such arrangements. The change is due to come into effect in Ireland on the date of the passing of the Act and at an EU level from 1 January 2016.

9 Large Irish Corporates and PLCs

Finance Bill 2015 gives effect to a number of measures that are unlikely to be of surprise for Irish corporates, with most of the measures of interest to Irish business being well flagged in advance. The introduction of a Knowledge Development Box - while intended to boost Ireland’s tax competitiveness - is unlikely to be of significant benefit to the corporate domestic sector due to the onerous conditions applying. In line with the approach agreed as part of the OECD’s BEPs project, the introduction of Country by Country reporting will be a real compliance burden for large Irish businesses, and is likely to result in increased scrutiny on corporate structures by Revenue authorities. The exemption from income tax on vouched expenses for non-resident, non-executive Paraic Burke directors is a welcome change overall for Irish Plc’s but it will remain an issue for expenses paid to Irish resident non-executive directors. +353 1 792 8655 [email protected] As announced by the Minister on Budget the information required to be filed. It is day, the measures introduced by Finance intended that the reports will ultimately be Bill 2015 are primarily focused on shared with other tax authorities on a improving the tax situation for workers confidential basis. Companies who will with the objective being to ensure that the have to file CbC reports will need to benefits of a growing economy are felt by consider their overall tax strategy in light every family in the country. With this of this new filing obligation. stated focus, one could be forgiven for The Knowledge Development Box will thinking that Irish business has been provide for a 6.25% rate of corporation tax largely ignored. However, there are a to apply to the profits arising from number of areas that will impact on how qualifying intellectual property which is Irish corporates operate and which should the result of qualifying R&D carried out by mean that Ireland’s corporate tax regime is the company. While welcome, it is aligned with developments as part of the expected that the regime will be of limited OECD’s BEPS project. benefit to the domestic corporate sector The introduction of legislative proposals given the significant costs associated with for Country by Country (CbC) reporting, investing in and generating the qualifying with effect from 1 January 2016, should be intellectual property, as well as the of limited surprise for Irish corporates. As a requirement to engage in substantive result of the Finance Bill provisions, Irish operations that have a high ‘value add’ for headquartered multinational groups will the Irish economy. be required to file CbC reports of their income, activities and taxes with Revenue. The Finance Bill enables Revenue to make regulations setting out further details of

10 The introduction of a bona fide test where an Irish resident company is involved in any scheme of reconstruction or amalgamation which involves the transfer of the whole or part of a company’s business to another Irish resident company is intended to close out a perceived abuse of a Capital Gains Tax relief. Following on from the recent consultation on the tax treatment of expenses, the Finance Bill makes provision for vouched expenses, incurred by non-resident, non-executive directors travelling in the course of their duties to be exempt from income tax. The focus of the provisions on non-resident, non-executive directors, means that Irish Plcs will still need to consider the tax treatment of expenses paid to Irish resident non-executive directors but the confirmation in respect of non-resident, non-executive directors is a welcome development nevertheless.

11 Country by Country Reporting

Finance Bill 2015 includes legislation introducing Country by Country Reporting (CbCR) for Irish parented multinational enterprises. The proposed legislation requires Irish parented multinational enterprises (MNEs) with consolidated annualised group revenue of €750 million or more to comply with the CbCR requirements. Under the proposed legislation, MNEs will be required to prepare a CbC report to include specific financial data covering income, taxes and other key measures of economic activity by territory. The first CbC report should be prepared for fiscal years beginning on or after 1 January 2016, and filed within 12 months of the year end. Failure to provide a CbC report or the provision of an incorrect or incomplete report will trigger a penalty of €19,045 and in some instances a further penalty of €2,535 for Ronan Finn each day that failure continues. +353 1 792 6105 The requirement to file a CbC report will have major implications for how MNEs [email protected] establish and support their intra-group arrangements. Preparation in the form of dry runs and initial analyses of the output is key.

In July 2013, in response to political and The proposed legislation will require economic pressures, and in a growing compliance by Irish parented climate of austerity and focus on the multinational enterprises with contribution from business, the consolidated annualised group revenue of Organisation for Economic Co-operation €750 million or more. CbCR requires and Development (OECD) issued its Action organisations to file a report annually with Plan regarding Base Erosion and Profit the Irish Revenue authorities, disclosing Shifting (BEPS). The two key pillars of the the following data points for each tax BEPS action plan are Substance and jurisdiction in which they operate: Transparency. From a transparency • The amount of revenue, profit before perspective, the BEPS action plan means a tax, and income taxes paid and accrued. hugely significant increase in the level of • Capital, retained earnings and tangible Transfer Pricing Documentation (TPD) assets, together with the number of required, of which CbCR forms a key employees. component. • Identification of each entity within the Many countries, including the UK, group doing business in a particular tax Australia, Spain, Netherlands, Mexico and jurisdiction, with a broad indication of Denmark, have already started to legislate its economic activity. for the introduction of CbCR. Ireland has The first CbC report should be prepared for now introduced similar legislation in this fiscal years beginning on or after 1 year’s Finance Bill. January 2016, and filed within 12 months of the year end.

12 The proposed legislation also enables Irish Revenue to make regulations to include secondary filing mechanisms that could apply in certain circumstances, and to give effect to the manner and form in which a CbC report is to be provided. Failure to provide a CbC report or the provision of an incorrect or incomplete report will trigger a penalty of €19,045 and in some instances a further penalty of €2,535 for each day that failure continues. CbCR, and the wider changes to TPD, will fundamentally change the way Irish multinational enterprises must document intercompany transactions, and create a significant administrative burden. Consideration should be given to how this information and data will be reported, whether finance systems have the necessary capabilities to gather the required data and what ongoing additional resources are needed to implement and manage CbCR. Preparation in the form of dry runs and initial analyses of the output is key. Tax transparency is of increasing importance for multinational organisations, and is no longer just an issue for the Head of Tax. Engagement at Board level early on will be crucial in ensuring that CbCR (and wider TPD requirements) are implemented effectively and in line with the organisation’s tax strategy and approach to transparency.

13 Agri Sector

On Budget Day, Mr Noonan announced that there would be a continuation of the measures targeted at encouraging the transfer of the farm to the next generation. This would involve an extension of all stock reliefs and the Stamp Duty relief for Young Trained Farmers to 31 December 2018. He also announced the introduction of a new succession farm transfer partnership initiative to encourage the lifetime transfer of family farms which involves an additional tax credit of up to €5,000 to be shared by the partners. The bill contains each of these measures. However, because this new succession initiative has been linked to new rules related to existing registered farm partnerships, there will be a significant number of conditions to be met in order to be able to avail of this relief. The bill also contains anti-avoidance measures aimed at perceived abuses of the income tax exemption for leasing Ronan Furlong of farm land. +353 53 915 2421 [email protected] Succession Issues The conditions to qualify for this relief include the following: One of the key recommendations arising from the Agri-taxation review in 2014 was • The partnership can have 2 or more to introduce tax measures to encourage members, must be established for a the transfer of farms to young farmers. specified period of between 3 and 10 A number of these recommendations were years and at the end of this specified introduced in last year’s budget. One issue period, at least 80% of the farm assets however that can cause a delay in the must be transferred to the younger lifetime transfer of farms is the need for farmers. both parties to derive an income stream • The younger farmer must not be aged from the farm. To help overcome this issue, over 40 when the farm partnership the Government is introducing a new is set up, must have an appropriate succession farm partnership incentive. agricultural qualification and must be The Finance Bill provides for an extension entitled to at least 20% of the profits. of the existing registered farm partnership In addition, he/she must be personally rules to allow for succession farm involved in the farming activities for an partnerships to be included on a register average of at least 10 hours per week. to be set by the Minister for Agriculture, • The younger farmer cannot receive Food and the Marine. any share of the tax credit after 40 years of age. The new proposals will allow for an • The partnership can include a spouse income tax credit worth up to €5,000 per or civil partner of the younger farmer annum for up to five years to be allocated who is not an active farmer to the partnership and split according to • If the transfer does not go ahead at the the profit-sharing agreement. If there are end of the specified period, there would no profits in the year of assessment, be a clawback of the income tax credits. no tax credit would be available. The difficulty with this new relief is that,each succession farm partnership would first need to meet all the criteria of a registered farm partnership and, as discussed below, the Finance Bill contains

14 a very significant expansion of the • New rules to allow the appointment Anti-avoidance conditions that must be met before of Inspectors to ensure that a farm Income tax exemption in relation to a farm partnership can be included partnership is operating in accordance leasing of farm land has been a feature on the register. with the conditions for registration. of agri-tax for many years. Last year, the This new incentive is subject to The Bill also introduces provisions for exemption for leases of 15 years or more EU state aid approval. a right to appeal any decision by the was increased to €40,000. With effect Minister to refuse to enter a farm from 1 January 2016, a lease will no longer Transfers of farm assets to the next partnership on the register of farmer be a qualifying lease for the purpose of the generation will benefit from the extension partnerships or to remove a farm exemption if the lessee is also a qualifying of stamp duty exemption for Young partnership from the register. The lessor in relation to farm land let under a Trained Farmers to 31 December 2018 and Minister will be require to set out his different lease. This is aimed at perceived the retention of the 90% agricultural relief reasons in writing to the precedent acting abuses of the exemption. from CAT. These transfers will also benefit partner and that decision can be appealed from the increase in the gift/inheritance within 21 days. The appeal will be heard by Productivity Issues tax (CAT) threshold from Parent to Child a specially appointed Appeals Officer (not Stock relief is an important incentive for from €225,000 to €280,000. This should the Appeal Commissioners). The decision farmers who are building up their stocks, mean that even large farm enterprises of the Appeals Officer may be further particularly now that milk quotas have could transfer to the next generation appealed to the High Court on a point of been abolished. All available stock reliefs without incurring a CAT liability when law but that is as far as the appeal process were extended for a further three year you factor in the agricultural relief of 90%. can go. The Bill set out the rules for the period up to 31 December 2018. Registered Farm Partnerships appointment of an Appeals Officer and the qualifications that the person must have to Forestry Income The Finance Bill contains a very significant serve in that role. expansion of the conditions that must be Forestry Income has been removed met for a farm partnership to be included The tax advantage of having a registered from the High Income Earners on the register of farm partnerships farm partnership under current rules Restriction category. maintained by the Minister for Agriculture was an increased level of stock relief. In Income Volatility Food and the Marine. Among the main addition, registered farm partnerships can changes are: benefit from non-tax benefits including No additional measures were introduced access to higher levels of grant assistance. • Each member of the partnership must in this Finance Bill to combat income While the introduction of the succession volatility. Income Averaging for farmers spend at least 10 hours per week on farm partnership credit has been broadly average personally engaged in the was increased from three to five years in welcomed by the agriculture sector, it must last year’s Finance Act and this came into farm activities be remembered that the succession tax • No partner can be a director or effect on 1 January 2015. Whilst this credit for families is just €5,000 per year should have a long term positive impact shareholder in a company that is to be shared between all the partners. In also a partner in the partnership by providing a longer timeframe over addition, because of the increased level of which income volatility can be smoothed, • The partnership agreement must conditions that must be met to be first as a be in writing, must comply with the this may have a short-term negative registered farm partnership it remains to impact on farmers in 2015 due to the Partnership Act 1890 and must be seen what the uptake will be. commit the partners to operating significant drop in farm income currently as a partnership for at least 5 years being experienced. (conflicts with the Succession Farm Partnership rules which stipulate a minimum of 3 years)

15 Property

Home Renovation Incentive (HRI) CGT Losses on “section 23” Properties The Budget announced the extension to the Home Renovation Incentive (HRI) A technical amendment has been made to which was first introduced in Finance Act the interaction between the restriction of 2013. The HRI offers a tax incentive of up capital gains tax (CGT) loss relief and to approx. €4,050 for homeowners wishing “section 23” property relief to ensure that a to renovate a property. This was extended CGT loss incurred on the disposal of a in Finance Act 2014 to apply to landlords “section 23” property will not be renovating residential properties, with the unnecessarily restricted where the €4,050 limit applying to each property. property is sold within a 10 year period This relief was due to expire at the end of and a claw back of the income tax relief is Tim O’Rahilly 2015 but the Minister announced that this suffered. This will ensure equitable will now be extended to the end of 2016 +353 1 792 6862 treatment for those who have sold and this has been confirmed by the properties within a 10 year period and [email protected] Finance Bill. This is a welcome extension have been subject to a claw back of their to an incentive which has been successful income tax relief. and generally regarded as beneficial to the construction sector. Returns by Lessees and Agents As expected there were minimal changes There has been an amendment made to in the Finance Bill in relation to property CG50 Tax Clearance Certification the provisions which allow Revenue to measures. Broadly these were in line An amendment has been made to increase obtain information on let properties. The with the changes announced in this the threshold for obtaining a CG50 tax new provisions require property agents to month’s Budget together with a few clearance certificate from €500,000 to include, in a return of information, the tax minor, and mostly welcome, additions. €1,000,000 for houses only. The CG50 reference number of each property owner The Home Renovation Incentive has been clearance provisions provide for a and the Local Property Tax (LPT) number. extended for a further year whilst the deduction of 15% from the purchase price In addition there is a requirement for increased threshold for CG50 clearance of certain property related assets, to be Government bodies paying rent or rent in respect of houses should reduce costs paid over to the Revenue Commissioners, supplement to include, in the return of and delays in relation to residential in circumstances where a tax clearance is information, the LPT number in respect property sales. Technical amendments not provided by the person disposing of the of each residential property. The were introduced in relation to CGT losses assets. However, there is an exemption commencement of these new provisions arising on the disposal of certain tax where the proceeds are below the is now subject to Ministerial Order. incentive properties whilst letting agents threshold. The revised threshold applies to and government bodies may be required a “house” only (which is broadly defined as to provide additional information in a dwelling house or part of a dwelling respect of landlords and their properties. house and associated land/buildings). The limit remains unchanged for other assets. This is a positive change which will help reduce administration costs and delays in relation to residential property sales.

16 Interest deduction on loans to acquire private residential property In computing taxable rental profits, the deduction available for interest incurred on loans to acquire private residential property is restricted to 75%. To incentivise landlords to rent their properties to tenants in receipt of social housing supports, an amendment is made to reinstates the full 100% interest deduction. The landlord must undertake, for a period of at least three years, to provide accommodation to such tenants and must register such undertakings with the Private Residential Tenancies Board within certain time limits. The landlord can avail of the increase in interest deductions from 75% to 100% after the end of the three year period provided other conditions have been fulfilled. The additional annual 25% deduction for the three-year period will be rolled up and allowed as a deduction against rental profits in year four (in addition to the normal 75% interest deduction available in that year.) The new provisions specify 1 January 2016 as the earliest date and 31 December 2019 as the latest date in which a three-year undertaking period to rent to social housing support tenants can commence. In essence, a landlord will be able to avail of the scheme for a maximum period of six years provided the first three-year undertaking is commenced not later than the end of 2016.

17 Pensions

Following on from the ending of the Pension Levy which was officially confirmed during the Minister’s speech last week, there was some additional good news for pensions in today’s Finance Bill in relation to tax relief on Employer PRSA contributions. However, as anticipated the Bill does not contain any measures to increase pension limits which look set to remain at current levels over the medium term.

Employer PRSA Contributions No indexation of limits The Bill provides for an exemption for As we anticipated last week, the Bill employees from USC on employer confirms that the pension limits have Munro O’Dwyer contributions to a PRSA, to bring the USC remained static - including the €115,000 +353 1 792 8708 treatment of such contributions in line earnings limit for personal contributions. [email protected] with employer contributions to Indeed in relation to the Standard Fund occupational pension schemes. While a Threshold, it is worth noting that since its welcome change, many employers have reduction to €2 million on 1 January 2014 already migrated their Group PRSAs into it has yet to be increased. It will be an occupational pension scheme structure interesting to see whether this is a policy since this anomaly arose as a result of decision or whether any earnings provisions contained in the 2011 Finance adjustment factor will be declared in Act. December by the Minister. PRSAs will become relatively more Our advice to any individual with material attractive as a means through which to pension entitlements would be to consider provide pension benefits to staff - in whether future contributions might attract particular as the requirement for a penal rate of taxation at the point of Trusteeship is eliminated through a PRSA access, and to explore the opportunities structure. That said, limits on Employer that are available to them to manage this contributions that apply to PRSA exposure. arrangements, and the greater level of price competition in the occupational pension scheme space do remain as barriers to growth.

18 19 Employment Taxes/ Individual Taxes

Finance Bill 2015 brings some significant surprises beyond the changes already announced in Budget 2016. The Bill proposes a measure to exempt from income tax, USC and PRSI the travel and subsistence expenses of non-resident non-executive directors (‘NEDs’) for attending board meetings. The proposed tax treatment will have a significant impact on Ireland’s competitiveness as a location for foreign direct investment and will assist Irish companies competing with other jurisdictions to attract internationally experienced NEDs to their boards. The Bill also puts on a legislative footing the ‘small benefits’ concession allowed by Revenue and increases the annual concession limit from €250 to €500. Mary O’Hara Finally, confirmation that the territorial scope of Relevant Contracts Tax includes +353 1 792 6215 the Irish Continental Shelf will be of significant interest to businesses in the energy [email protected] and telecoms sectors.

Income Tax and USC There were no additional changes to the income tax or USC rates, bands or thresholds beyond those announced in the Budget. The confirmed USC rates and bands for 2016, with a comparison to 2015, are as follows:

2016 Bands Rate 2015 Bands Rate €0 - €12,012 1% €0 - €12,012 1.5% €12,013 to €18,668 3% €12,013 - €17,576 3.5% €18,669 to €70,044 5.5% €17,577 - €70,044 7% €70,045 and above 8% €70,045 and above 8% €100,000 and above* 11% €100,000 and above* 11%

*Self-employed income only

However, the Bill introduces a change to remove employer contributions to Personal Retirement Savings Accounts (PRSAs) from the charge to USC. This brings the treatment of such contributions in line with employer contributions to occupational pension schemes.

20 Non-Executive Directors (‘NEDs’) Relevant Contracts Tax (RCT) Tax treatment of payments to Standard Life shareholders The Irish tax implications of the payment RCT is a withholding tax regime that or reimbursement of travel and subsistence applies on payments made to certain Owing to postal delays earlier this year, expenses to NEDs for attending board contractors for the performance of certain Irish shareholders in Standard Life faced meetings in Ireland has given rise to works defined as ‘relevant operations’. The an income tax liability on a return of value differing views in recent times. The Bill scope is broad and includes construction, from the company, even where they had proposes legislation to exempt non- energy, telecom, meat-processing and elected to receive this as capital. The Bill resident NEDs from income tax, USC and forestry operations. effectively extends the election date up to PRSI in respect of vouched expenses which capital gains tax treatment applies The Bill confirms that the territorial limit incurred for attendance at such board and avoids an unexpected income tax for applying RCT includes the designated meetings. liability for such shareholders. areas of the Irish Continental Shelf. This is While most welcome, the new legislation in addition to RCT applying to works Marriage equality does not extend to Irish tax resident NEDs. carried out in the territory of Ireland and It would be helpful if the Department of its territorial waters. The designated areas As expected, the Bill amends the Taxes Finance commented on the drivers for of the Continental Shelf are the extension Acts to provide for the tax assessment of limiting the new legislation to non-resident of Ireland’s territorial waters where the same-sex married couples following the NEDs and the prospects or timing for natural land extends under the sea to the signing into law of the Marriage Act 2015. extending the new legislation beyond outer edge of the continental margin. non-residents. Ireland’s current designated Continental Shelf is one of the largest seabed territories The new provisions will be effective from 1 in Europe and extends in places beyond January 2016. Further engagement with 200 nautical miles from the coastline the Department of Finance and Revenue baseline. will be required to fully understand the practical application of this solution. The Bill effectively reverses a Revenue e-brief from earlier this year and broadens Small Benefits Relief the scope of RCT such that it applies to The Bill introduces a new legislative relevant operations undertaken in the Irish exemption from income tax, PRSI and USC Continental Shelf by offshore industries on ‘qualifying incentives’ provided by such as oil and gas companies, those employers to employees (including involved in the construction of offshore directors). ‘Qualifying incentives’ include windfarms and those laying cables or both vouchers and benefits. A ‘benefit’ is similar type work for the defined as a tangible asset other than cash. telecommunications space. Consequently, Only one voucher or benefit may be given it is a very significant confirmation with to an employee in any one year, the value important implications for a range of of which cannot exceed €500, and a industries performing work in the Irish voucher must not be exchangeable in part Continental Shelf. or in full for cash. The voucher must not be Chargeable persons part of any salary sacrifice arrangement between the employer and the employee. Currently, where the net non-PAYE income of an individual exceeds €3,174 the This relief builds on an existing Revenue individual is considered a chargeable concession whereby employers could person. This brings the individual within provide an employee with a single tax-free the self-assessment system, which imposes non-cash benefit of up to €250 in a year. additional tax payment and filing The new rules are applicable from obligations. The Bill increases this 22 October 2015. threshold from €3,174 to €5,000. While income tax and USC applies to non-PAYE income regardless, the amendment also has the effect of increasing the threshold above which PRSI on non-PAYE income applies.

21 Financial Services

Banking • if the payment is made by or through a person in the State, then either the Treatment of Additional Tier 1 Instruments quoted Eurobond is held in a recognised Finance Bill 2015 proposes to allow a clearing system or the beneficial owner deduction for certain interest/dividend of the quoted Eurobond is not resident payments made in respect of capital in the State and has provided a non- instruments issued by banks in order to resident declaration to the bank. satisfy their Tier 1 capital requirements. Encashment Tax Until now, no deduction has been permitted for interest payable in relation to The date for the filing of the annual any Tier 1 capital so this represents a very encashment tax return has been extended significant and welcome move. from the current 20 days after the end of John O’Leary the year of assessment (i.e. 20 January) to Currently, all instruments issued by banks +353 1 792 8659 46 days after the end of the year (i.e. 15 to meet their Tier 1 capital requirements February). [email protected] are regarded as equity or quasi-equity in nature. Accordingly, interest associated Stamp duty – cash cards, combined cards with the issue of a Tier 1 debt instrument is and debit cards not deductible for tax purposes. The Bill amends the existing Stamp duty Although the Budget speech contained Under the proposed changes, an regime on cash cards, combined cards and few references to Financial Services debit cards. specific measures, there are still a “Additional Tier 1 instrument” will be number of important provisions in the regarded as a debt instrument (rather than The Bill replaces the definition of ‘bank’ Finance Bill across the FS sector. as equity) and a payment of dividends or and ‘building society’ with ‘credit interest by Banks in respect of an institution’ and ‘financial institution’. It “Additional Tier 1 instrument” will be also inserts the definition of a ‘cash regarded as tax deductible interest. transaction’ and a ‘credit transaction’. An “Additional Tier 1 instrument” is The Bill replaces the existing annual flat defined in EU Regulations as a capital rate charge of €2.50 for each cash and instrument (i.e. security, bonds, notes, debit card and €5.00 for each combined shares, loans) that satisfies a prescribed list card, subject to certain exemptions which of conditions as set out in Regulation (EU) are to remain unchanged, with a charge on No.575/2013 of the European Parliament. withdrawals of cash from ATM machines The Bill also includes a reference to in Ireland using these cards. The rate of withholding tax on the payment of the charge is to be €0.12 for each such interest / dividend, saying that the withdrawal; but the annual charge is to be exemption from withholding tax that capped at €2.50 in the case of each cash applies in relation to interest paid on and debit card withdrawals and €5.00 in quoted Eurobonds will apply to the the case of each combined card. Additional Tier 1 instrument in the same The Bill also revises the reporting way as it applies to a quoted Eurobond. requirements for credit and financial Exemption from withholding tax applies to institutions, requiring them to report to interest on a quoted Eurobond where Revenue the total number of cash either: transactions in respect of each of the three • the bank uses a non-resident paying card types and the total number of each of agent, or

22 the three types of card to which the Aviation Sector legislation specifically designed for Irish amended stamp duty cap has been applied investment funds. The effect of the to. There is then an additional reporting Capital allowances for aviation services changes announced in the Finance Bill is requirement for credit and financial Finance Acts 2013 and 2014 proposed to apply the same tax treatment to ICAVs as institutions, requiring them to report the enhanced industrial buildings allowances currently enjoyed by Irish fund structures total number of each of the three types of on capital expenditure incurred on that are defined as collective investment card to which the monetary cap has not buildings employed in a maintenance, undertakings. This includes the provision been applied, together with the total repair or overhaul of commercial aircraft of tax exemption in respect of Irish income number of cash transactions in respect of trade or a commercial aircraft dismantling and chargeable gains. Of particular those cards. trade. However, the legislation never came relevance is the fact that collective into operation as it was subject to investment undertakings are specifically The new basis for the charge and the ministerial order which never defined as “a resident” for the purposes of revised reporting requirements for issuers materialised. the Ireland-USA double taxation treaty of the cards are to come into effect for the and the broadening of the definition to chargeable period 2016 and subsequent The Bill now introduces a revised version include the ICAV clarifies this position. years. of that legislation, amended to comply Furthermore, this clarification removes with EU State Aid rules, coming into uncertainty as to whether ICAVs can Exchange of Information operation with effect from 13 October qualify for the Ireland-USA treaty (subject The Finance Bill amends the provisions in 2015. The accelerated scheme of industrial to meeting the Limitation of Benefits relation to the automatic reporting and buildings allowances provides for tax provision requirements) and should exchange of financial information, by depreciation over a seven year period enhance the attractiveness of the ICAV to transposing DAC 2 (i.e. the revised instead of the normal 25 year period but is investment managers seeking to market/ Directive on Administrative Cooperation) limited to buildings costing up to €5million invest their funds in the US. into Irish law. DAC 2 relates to the OECD’s (where the expenditure is incurred by a Common Reporting Standard (‘CRS’) and company) and €1.25million (where the Anti-avoidance imposes an obligation on financial expenditure is incurred by an individual). Furthermore, the Finance Bill also institutions to carry out due diligence to The scheme, providing for accelerated broadens the scope of the anti-avoidance identify non-resident account holders and allowances over seven years, will operate provisions relating to company to report such data to the Revenue in respect of relevant expenditure incurred reconstructions and amalgamations and Commissioners. up to 13 October 2020. transfers of assets within a group to The EU Savings Directive legislation will Where the expenditure incurred on a include an ICAV. At present, anti-avoidance be repealed as this will be replaced by DAC qualifying building is in excess of the measures prevent the deferral of capital 2 / CRS. noted limits and / or is incurred after 15 gains tax on the disposal of asset(s) by one October 2020, industrial buildings company to another where the transfer is Life Companies allowances may still be claimed, albeit as a result of a reorganisation, Life assurance policies exit tax, non-resident over the longer 25 year period. Note that it amalgamation or as part of a group declarations is not possible to apportion such transfer where the acquiring company is expenditure as between the €5million / an authorised investment company. The Life assurance policies held by non- €1.25million amount qualifying for Bill ensures that this treatment is also residents are exempt from exit tax but accelerated allowances and the excess extended to prevent a capital gains tax there is currently a requirement that a above this. Once more than these specified deferral where the acquiring company is non-resident declaration is completed amounts have been incurred, allowances an ICAV. at or about the time the policy is incepted. will only be available on the total The Bill removes this requirement so that qualifying cost over the longer 25 year Appointment of Irish AIFM exit tax will not apply provided the period. Finally, the Finance Bill separately non-resident declaration has been made also provides confirmation that the prior to maturity, encashment or Asset Management appointment of an Irish Alternative assignment of the policy. Investment Fund Manager (“AIFM”) to ICAVs The Bill also extends the time period for a non-Irish Alternative Investment Fund The Finance Bill broadens the definition of refund claims where exit tax was applied does not bring the AIF within the charge a collective investment undertaking to to a chargeable event occurring on or to Irish tax. It is also expected that further include an Irish Collective Asset- before 31 December 2015. Previously changes will be made to Section 1035A to management Vehicle (“ICAV”). Legislation it was necessary to make a claim within update the legislation and bring it in line introducing the ICAV into Ireland was 4 years after the end of the chargeable with current regulatory requirements. enacted earlier this year, which offers fund period to which the claim relates. A refund promoters and investors a regulated claim can now be made within 4 years after corporate fund structure which can be the end of the chargeable period ending on established under bespoke Central Bank 31 December 2016.

23 Oil and Gas

defer or significantly curtail exploration investment in Ireland due to low oil prices, could result in perceptions of Ireland having higher geopolitical risk than other similar exploration locations.

Petroleum taxation Under the new fiscal terms, Ireland will maintain a concession system, with the industry rather than the State bearing the risk associated with investing in exploration. In addition, the corporation Ronan MacNioclais Stephen Ruane tax applicable to petroleum production +353 1 792 6006 +353 1 792 6692 will remain at 25%. [email protected] [email protected] However, a new tax has been introduced that will apply to productive fields, to be known as Petroleum Production Tax (PPT). The PPT will operate in a similar As expected, the Finance Bill introduces legislative amendments to effect changes to manner to the existing Profit Resource the taxation provisions relating to oil and gas exploration and production in Rent Tax (PRRT), and PRRT will continue Ireland. The changes introduced are in line with the recommendations of the Wood to apply to production from finds made Mackenzie Review of Ireland’s Oil and Gas Fiscal System, published in June 2014. under existing licence interests. PPT will be charged on net income on a The Wood Mackenzie recommendations The fiscal regime will have a direct impact field by field basis. PPT will apply at a rate aimed to achieve three main purposes: on project economics and investment on a sliding scale between 0% and 40%, • To increase the overall tax take for the decisions. Therefore the stability and determined by reference to the profitability State from the oil and gas industry certainty of the regime are critical to of that field. For PPT purposes, profitability • To ensure an earlier tax take for the ensuring that Ireland is seen as an will be calculated as (cumulative gross State attractive location for oil and gas field revenue less PPT paid)/cumulative • To address inconsistencies in the investment. The need for stability and field costs. This differs from the calculation existing fiscal system. certainty has been highlighted by industry made under the current PRRT system in players in PwC’s Oil and Gas surveys. In The legislative changes introduced in the that it includes revenue rather than this regard, the confirmation that the new Finance Bill seek to address these issues. after-tax profits and does not distinguish fiscal terms will not have retrospective The new terms will apply to licence between capital and operating costs. application is to be welcomed. authorisations granted on or after 18 June Net income subject to PPT will be 2014, including authorisations granted However, the introduction of unfavourable calculated as gross revenue from sales of under the 2015 Atlantic Margin Licencing changes to the tax regime at a time when petroleum extracted, including any Round, which closed on 16 September the industry is in down-turn (oil prices are amount derived from the assignment, 2015. For authorisations granted prior to at levels consistent with the 2009 disposal or sale of any assets, interest, this date, the existing fiscal terms will recession) and the fact that 48% of options or rights related to the field, less continue to apply. respondents to the PwC 2015 Oil and Gas exploration, development and Survey said that they were planning to abandonment expenditure incurred in respect of the field.

24 Provision is made for expenditure to be surrendered by way of election between group companies for the purposes of calculating PPT. Any PPT payable will be deductible as an expense in calculating the “normal” corporation tax due. As the highest PPT rate of 40% will apply only to the most profitable fields, the maximum tax rate that can apply to such fields is 55%. This is an increase from the maximum 40% tax payable under the current system. In addition to the above, a minimum PPT payment will apply to fields in each year of production, regardless of the profitability ratio. This payment will effectively act as a royalty and will be calculated as 5% of the field’s gross revenue after the cost of degree of disappointment that the However, the Bill would appear to transporting petroleum via pipeline from Government has proceeded with the represent a reversal of this eBrief as it now the field to the place where it is first landed changes to the tax regime at a time when brings into the scope of RCT all relevant in the State. Gross revenue includes all the industry is in turmoil due to low oil operations carried out in designated areas sales of petroleum extracted from the field, prices. Notably, 70% of respondents to the of the Irish Continental Shelf. A including any amount derived from the 2015 PwC Oil and Gas Survey believed ‘designated area’ is an area designated by assignment, disposal or sale of any assets, that the new fiscal regime should be order under section 2 of the Continental interest, options or rights attached to or deferred or revised to make it more Shelf Act, 1968. The designated areas of related to that field. appropriate, with only 19% believing it the Continental Shelf are the extension of should be introduced as initially intended Ireland’s territorial waters, where the This means that the State will get a return by Wood Mackenzie. It is therefore natural land extends under the sea to the from every successful find made under the disappointing that the fiscal regime has outer edge of the continental margin new system and will receive a share of been introduced at this time as it sends the beyond 200 nautical miles from the revenue in each year a field is in wrong message to industry about the coastline baseline, in places. Ireland’s production. However, this could cause Government’s seriousness in fostering a current designated Continental Shelf is cash flow difficulties in some cases as the viable petroleum industry in Ireland. one of the largest seabed territories in minimum PPT will still be payable even if Europe. the field is loss making. It will be important Significant Changes to Relevant for companies to ensure that this is built Contracts Tax Position The Finance Bill changes now bring the into their financial modelling prior to petroleum industry back within the scope taking any investment decisions in order to Relevant Contracts Tax (RCT) is a of RCT in respect of any work undertaken avoid any surprises during the course of withholding tax applying at a rate of up to in the Irish Continental Shelf. The Bill also the project. 35% on payments made to certain has the implication of broadening the contractors for the performance of scope of RCT such that it can now apply to PPT will be payable by the due date of the “relevant operations”. It has particular relevant operations undertaken in the Irish company’s corporation tax return for the relevance to the petroleum industry as Continental Shelf by other industries - period, and the same provisions as apply to work performed in relation to the such as those involved in the construction the collection and recovery of corporation exploration or exploitation of natural of offshore windfarms and those laying tax will apply. Companies liable to PPT will resources in the Irish seabed were cables or similar type work for the also be required to submit a return to generally within the scope of “relevant telecommunications space. It is therefore a Revenue in respect of the PPT giving a operations”. RCT was a key issue for the very significant change with important breakdown of cumulative filed costs and industry but, in May 2015, Revenue issued implications for a range of industries revenues to date. eBrief No. 54/15 which stated that RCT performing work in the Irish Continental The minimum 5% royalty may render would not apply where the relevant Shelf. certain high risk projects and marginal operations are undertaken outside of fields uneconomical and it had been hoped Ireland’s twelve mile territorial waters that the legislation would make some limit. It was a positive development and attempt to alleviate the burden for the welcomed by the industry. most marginal fields. There will also be a

25 VAT

From a VAT perspective, the main focus of the Finance Bill is the introduction of anti-avoidance provisions. Of particular interest is the introduction of anti- avoidance provisions relating to the Capital Goods scheme (“CGS”) which extends the connected party anti-avoidance rules under the CGS to include the supply of developed, but incomplete, immovable property. The inclusion of this provision will be seen as addressing a current gap in the legislation but what is not clear from the Finance Bill is whether the “stepping into the shoes” relief provision, which currently applies to the other CGS connected party anti-avoidance provisions, will be extended to this new provision. Also, in a sector where there is already complexity with regard to what type of Caroline McDonnell services qualify as VAT exempt educational services, the introduction of the provision specifying who qualifies for the exemption and enabling Revenue to make a +353 1 792 6526 determination that a specified educational activity is subject to VAT where its [email protected] exemption creates a distortion of competition may add an additional layer of uncertainty.

Administration Anti-Avoidance Measures

Amended & Supplementary VAT returns Notification to Suppliers of Cancellation of Revenue recognised that there may be an Number issue with the imposition of penalties as a An add-on to the introduction of the result of lack of legislation relating to provision enabling Revenue to cancel a amended and supplementary returns. As a VAT number is the introduction of a result, provision is made in the Finance Bill provision which allows Revenue, where it that any adjustment to a return is subject considers it necessary, to notify a person’s to the same provision as the original supplier of the cancellation of a VAT return. number. The intention of this provision is that the active publicising of cases where Power to Cancel VAT Number & Notification VAT numbers have been cancelled will to Suppliers of Cancellation of Number protect legitimate businesses from There is currently no provision for inadvertently partaking in fraudulent Revenue to cancel VAT registration trade e.g. intra-community acquisitions numbers. The Bill makes a specific using a cancelled VAT number. provision that Revenue has the power to cancel VAT registration numbers where Capital Goods Scheme the person does not become or ceases to be The Capital Goods Scheme (CGS) is a VATable person. intended to ensure that the level of VAT recovery taken in relation to immovable property reflects the use to which the property is put over its “VAT life”. Currently, anti-avoidance provisions apply in respect of connected party sales of a “completed” property where the VAT deducted by the vendor is higher than the

26 VAT applying on the sale. The Finance Bill Educational Services – Online Betting – Extension of VAT extends this provision to “incomplete” Clarification of Definition exemption properties. The provision contained in the Finance Bill Since 1 August 2015, bets placed with The inclusion of this provision will be seen brings VAT legislation relating to remote bookmakers and commission as addressing a current gap in the educational services in line with recent earned by betting exchanges from legislation but what is not clear from the case law. Currently, VAT legislation customers located in the State are subject Finance Bill is whether the “stepping into provides for a VAT exemption for the to betting duty. Similarly, since 1 August the shoes” relief provision which currently provision of education and vocational 2015, such bets and commissions have applies to the other CGS connected party training or retraining, by educational been treated as exempt from VAT. anti-avoidance provisions will be extended establishments recognized by the State. It To ensure a “level playing field” in the VAT to this new provision. also applies to the provision by “other treatment of established operators with persons” of education and vocational non-established operators (and their Electricity & Gas Services – Reverse Charge training or retraining, provided it is of a respective customers) and to remove any Mechanism similar kind to that provided by State potential disincentive to such operators Under existing VAT legislation, Irish VAT at recognised educational establishments. locating in Ireland, the Finance Bill the appropriate rate (currently 13.5%) is The Finance Bill provides for the continued provides for an extension to the VAT required to be charged by a taxable person exemption of educational services where exemption to bets placed by customers in respect of the provision of the following: provided by a “recognised body” as located outside the State and commission • Gas or electricity to a taxable dealer defined. Provision is also made for the earned by betting exchanges from carrying on a business in Ireland continuous exemption of tuition given customers located outside the State. This • Gas or electricity certificate to a taxable privately by teachers covering school or will be welcomed by many in the industry person carrying on a business in Ireland university education. to ensure that Ireland remains competitive As a result of amendments introduced in in this space. An associated amendment is also included the Finance Bill the reverse charge in the Bill which allows Revenue to make a mechanism will apply to the above- Margin Scheme determination that a specified educational mentioned supplies such that the recipient activity is subject to VAT where its The Bill confirms that the cross border of the supply will be required to self- exemption creates a distortion of supply of “new” means of transport does account for VAT on the reverse charge competition. not come within the margin scheme. basis in respect of the receipt of these services. The purpose of this provision is that it removes the opportunity for missing-trader fraud whereby a supplier may evade paying VAT collected on sales to the Exchequer. A supplier making such supplies will be required to issue an invoice indicating that the recipient is liable to account for VAT in respect of the receipt of these services.

27 Excise Duty

The Finance Bill introduces a small number of changes in the field of excise. As expected, included were the changes to the rates of excise duty applying to tobacco products and relief provided for microbreweries. Other changes include the ability for an authorised excise warehousekeeper to be required to file relevant excise returns on an electronic basis. In addition, and following the trend of increasing monitoring and compliance by Revenue, the applicant or holder of a tax warehouse authorisation will now face additional compliance requirements. A fuel grant scheme to be provided to beneficiaries of the Disabled Drivers and Disabled Passengers (Tax Concession) Scheme has also been introduced with further details to follow by way of secondary legislation.

John O’Loughlin +353 1 792 6093 Tobacco Products - Rate Changes Tax Warehouses – Authorisation and Compliance Changes [email protected] As announced in the Budget and effective from midnight on 13 October 2015, the Subject to the introduction of secondary excise duty on the price of a packet of 20 legislation, an authorised excise cigarettes increased by 50 cents (VAT warehousekeeper will be required to file inclusive). In addition, a corresponding relevant excise returns on an electronic pro-rata increase was applied to the other basis. Further details on specific categories of tobacco products (i.e. cigars requirements and compliance obligations and other smoking tobacco) with a duty will be made available at a later stage. increase of 25 cents (VAT inclusive) arising For the purposes of acting as a tax on a 25g pack of roll-your-own tobacco. warehousekeeper for excisable products, Excise duty relief for the Finance Bill introduces a requirement microbreweries that in order to apply for, and operate an authorisation, the applicant or holder of an Finance Bill confirms the availability of a authorisation must be compliant with cash flow incentive for microbreweries. excise law which includes internal controls Instead of having to pay and reclaim the relevant to systems, and relevant reduced rate of excise duty, procedures relating to excisable products. microbreweries qualifying for the relief In addition, tighter controls have been (i.e. microbreweries which produce not introduced relating to the requirements more than 30,000 hectolitres per annum) which must be met in applying to operate a can now claim the relief upfront without tax warehouse. Finally, the Finance Bill the need to pay it first. strengthens the powers of the Revenue Commissioners to refuse or revoke an authorisation where certain requirements are not met.

28 Disabled Driver and Disabled Drivers Fuel Grant Subject to the introduction of secondary legislation, the Finance Bill provides for the introduction of a fuel grant scheme to be provided to beneficiaries of the Disabled Drivers and Disabled Passengers (Tax Concession) Scheme. This grant will bring Ireland in line with the EU Energy Tax Directive.

Other measures introduced include: • Providing additional powers to Revenue relating to the examination and search of vehicles and to enter and search premises. Amongst the measures provided for is the ability of Revenue to seize computers (including laptops, mobile phones and other storage media) while investigating a suspected excise fraud. • Bringing Irish legislation in line with EU legislation, there is a change in definition of ‘counterfeit goods’ for the purposes of alcohol products. • Ensuring that VRT and Motor Tax regimes are aligned, an amended definition of ‘motor caravan’ has been added. • The administration charge applying to the export of a vehicle for the purposes of the VRT Export Repayment Scheme has been reduced from €500 to €100.

29 Tax Compliance & Administrative Matters

In addition, the legislation is amended to such information from a third party shall provide that the timeframe within which not be disclosed to the taxpayer. However, marketers of these transactions have to Revenue must have reasonable grounds for provide Revenue with details of each suspecting that the disclosure of the order person connected to the transaction is now would lead to serious prejudice of the 21 ‘working days’ from the date of the proper assessment or collection of the tax. notice from Revenue, and not 21 ‘days’ as Revenue’s powers to obtain information per existing legislation. from various sources where foreign tax is Obligation to keep certain records at issue is also amended to allow for an application to be made to the Appeal The Bill contains a new provision which Commissioners for their consent to seek appears to impose a requirement on a Freda Jordan taxpayer information relevant to foreign person who has an obligation, either on tax matters from a third party (where that +353 51 39 9864 their own behalf or on behalf of another third party name was provided by a [email protected] person, to maintain books or records in financial institution). This eventuality respect of a trade, profession or other may arise, for example, where such activity, to retain the records of that information is sought from Revenue by a activity for an open ended period after the foreign tax authority under existing legal In keeping with previous years, this trade or activity ceases. The explanatory arrangements, such as a double taxation year’s Finance Bill contains a number of memo accompanying the Bill states that agreement. compliance and administrative changes the obligation to retain the records is for a impacting on taxpayers generally. 5 year period after cessation. There may Discharge of Revenue therefore be an error in the drafting of the Commissioners’ and Collector- General’s functions section and it remains to be seen if the Mandatory disclosure of certain wording will be amended as the Bill A minor amendment is contained in the transactions progresses through the next stage. Bill to provide that, with some exceptions Mandatory disclosure rules in respect of relating to court proceedings initiated by The existing provisions which impose a transactions under which a person obtains the Collector General, Revenue may requirement that records are to be retained or seeks to obtain a tax advantage have nominate any of their officers to discharge for ongoing chargeable activity for a period been amended with regard to their the duties of either the Revenue of up to 6 years after the period in which disclosure obligations. Existing legislation Commissioners or the Collector General in the related tax return is filed remain in requires certain persons to include the relation to the collection of tax, recovery in place. transaction number in their tax return to cases of civil proceedings and the power to comply with these obligations. In Revenue powers request a taxpayer’s statement of affairs. circumstances where the transaction was not assigned a transaction number, or Extended powers are granted to Revenue, where the person was not provided with a with effect from 1 January 2016, to allow transaction number, the person seeking them seek taxpayer records and the tax advantage is deemed to meet their documents from banks and other third disclosure obligations and avoid a penalty parties to include cases where the specific where that person provides Revenue with identity of the taxpayer(s) is unknown at certain required information. The Bill now the time the information request is made confirms that this information must be but who is capable of being identified by provided by the return filing date for the other means. The amendments also relevant year of assessment/accounting provide that the contents of any court period. order which may be granted in seeking any

30 Penalty for deliberately or carelessly making incorrect returns The legislation is amended to provide that the basis for calculating the penalty for deliberately or carelessly filing an incorrect tax return which gives rise to a tax repayment claim is similar to the basis on which the penalty is calculated in cases where an actual tax liability arises (that is, the penalty is computed as a percentage of the tax which has been repaid because of an ‘excess’ claim).

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