Baxter & Associates

Baxter & Associates CERTIFIED PUBLIC ACCOUNTANTS & REGISTERED AUDITORS Your Ref: Our Ref: Date The Board of Directors Federation of Irish Fishermen Ltd C/o Irish South & West Fish Producers Organisation Limited The Pier Castletownbere Co Cork CB/ISWFPO/CS/LA 15th October 2007 Dear Sirs, Re: Proposed Decommissioning: Scheme 2007 for Irish Fishing: Fleet Reference: Summary Report on the Taxation Implications of the Proposal for Decommissioning: We refer to recent correspondence, e-mails and discussions. As requested, we set out hereunder our Summary Report on the taxation implications of the proposed Decommissioning Scheme 2007. We confirm that we have spoken directly with both the Office of the Revenue Commissioners and the Department of Finance, on behalf of the Federation, regarding the tax implications for vessel owners who may avail of the proposed Decommissioning Scheme. As outlined the taxation treatment of the proposed Scheme will be crucial to the take-up and ultimate success of same. We understand that the proposed Decommissioning Scheme will provide for the following:-  Circa € 66 million will be made available to decommission vessels and tonnage in the Irish fishing fleet sector.  Vessels in excess of eighteen meters and older than ten years will qualify for approx. € 58 million of the total proposed decommissioning fund.  The proposed Scheme will target a minimum 40% reduction in tonnage (approx. 11,140 gross tonnes)  Focus will be on reducing the catching capacity of pressure stocks (i.e endangered species).  Maximum compensation payments will be in the order of € 6,500 per G.T for qualifying vessels with € 7,500 per G.T. available for certain qualifying polyvalent pelagic vessels.  A reduction on decommissioning compensation payable will apply based on the age of the vessel (i.e 1 % reduction for each year of vessel in excess of twenty years) Arising from our discussions with Revenue etc and from recent discussions held by B.I.M, we understand that the view of the Revenue Commissioners is that the proposed Decommissioning payments receivable will be treated as capital in nature and subject to taxation as follows:- 1. Subject to Capital Gains Tax where a Chargeable Gain arises on the disposal of both the vessel and the tonnage. For calculation purposes it is proposed that the compensation should be apportioned between the vessel and the tonnage by reference to the market values at the time of disposal. The current rate of Capital Gains Tax is 20%. 2. Subject to Income Tax / Corporation Tax where Capital Allowances have been claimed in prior years and a claw - back of allowances (i.e Balancing Charge) arises. All vessels in use for the purpose of a trade qualify for annual capital allowances. The claw-back or Balancing Charge is restricted to the actual amount of Capital Allowances granted in the prior years. The current marginal rate of Income Tax / PRSI is 46.50%. The Current Rate of Corporation Tax is 12.5% We further note that Revenue have advanced the case for application of the following existing reliefs in respect of any potential taxation liabilities arising from the above proposed treatment:-  Retirement Relief for Capital Gains Tax purposes. Broadly to qualify an individual must be at least 55 years of age and held qualifying trade assets for a minimum period of 10 years at the time of disposal. In such cases where the disposal proceeds do not exceed € 750,000 full relief against Capital Gains Tax on the disposal of qualifying trade assets is available. Where the disposal proceeds exceed € 750,000, marginal relief applies so as to limit the amount of Capital Gains Tax payable on the disposal to one-half of the difference between the amount of the consideration / proceeds and € 750,000. Retirement Relief is not available to companies.(Section 598 TCA 1997)  Annual Exemption. Capital Gains of the first € 1,270 per annum for each individual are exempt for Capital Gains Tax purposes.  Balancing Charge. Where a liability to Income Tax / Corporation Tax arises on a Balancing Charge, the charge arising from decommissioning payments may be spread over a three year period (Section 288(6) TCA 1997) 

The above is a synopsis of the position to date. Having worked with the fishing industry for the past twenty five years, we believe the following is the reality of the situation:-  Those vessels which the proposed Decommissioning Scheme specifically wish to target currently carry substantial encumbered bank debt, in that the majority of such vessels are heavily mortgaged to the Irish banking sector.  The majority of vessels to be targeted are held in the name of individual sole traders or partnerships. In a large number of instances the original vessel owners will have passed on ownership in whole or in part to their younger family members or indeed younger copartners. In such instances Retirement Relief for Capital Gains Tax purposes will not provide any material relief.  The individual Annual Exemption to Capital Gains of € 1,270 is of no material relevance to the overall proposed Scheme.  The proposed Scheme will apply to vessels often years old or greater. In the vast majority of cases such vessels will have a Nil tax value for capital allowances purposes. This position has broadly been accepted by Revenue. Accordingly, any vessel compensation receivable will in such cases give rise to a substantial Revenue claw- back (i.e Balancing Charge) at the potential marginal top Rate of Income Tax / PRSI of 46.50 %.  The above scenarios may be further complicated by the fact that in years past some vessel owners may not have assigned a specific value to the Licence and Tonnage because same may not have had any material value at the time of acquisition. This may be particularly relevant to vessels greater than ten years old. Accordingly, historic capital allowances may have been claimed on the full cost of the vessel with no corresponding cost excluded for Licence and Tonnage. This situation will give rise to an increased Revenue Balancing Charge for Capital Allowances purposes while leaving no (A) Licence I Tonnage - Tax Exemption Unlike farming milk quotas, vessel licence and tonnage costs do not qualify for Capital Allowances under existing Revenue Legislation. Similarly Salmon Licence costs do not qualify for Capital Allowance purposes. In accordance with Revenue Tax Briefing July 2007 (Issue No. 66) that part of the Salmon Hardship Scheme compensation which relates to the 2006 licence fee will not be liable to taxation. base cost available for Capital Gains Tax purposes. All parties involved with the Irish fishing industry recognise the importance of aligning key concessions regarding taxation with the proposed Decommissioning Scheme 2007. These concessions may be precedent concessions based on previous tax concessions granted to various industry sectors or new concessions which would require specific Finance Bill approval. There are many examples of precedent concessions which the fishing industry now argue should as a minimum apply to the proposed Scheme as follows:-

Any argument by Revenue that the proposed vessel Licence / Tonnage compensation under the proposed Scheme may be construed as a tradeable asset and therefore liable to tax is not relevant as: (I) Any transfer of Licence / Tonnage in prior years has been restricted by the limited number of vessels operating in the Irish fishing sector in the segments greater than twelve meters. (Reference Page 60, Report on Strategy for a Restructured, Sustainable and Profitable Irish Seafood Industry 2007-2013). (II) Any transfer has been restricted by legal and Marine Regulations imposed (i.e active tonnage requirements and transfer requirements etc. imposed by the Department of Marine). (III) Any transfer has been further restricted by the actual lack of viability of the Irish fishing sector as a profitable industry in the past years. (Reference Report on Strategy for a Restructured, Sustainable and Profitable Irish Seafood Industry 2007-2013). The fishing industry would therefore argue that in the case of the proposed 2007 Decommissioning Scheme that part of the proposed compensation applicable to the Licence / Tonnage costs should be exempt in whole or in part for taxation purposes. Such precedent concession already exists in relation to the Salmon Hardship Scheme. (B) Decommissionine Compensation - Exemption Based on ' Mulder' Scheme Tax Treatment 'Mulder' compensation is named after the Dutch farmer who successfully claimed against the Council and Commission of the European Community that he had the right to a milk quota. A number of Irish farmers became entitled, as a result, to compensation for loss of milk production dating from the EC's decision of 18th May 1992. In accordance with Revenue Tax Briefing No. 14, the taxation of the said compensation was dealt with as follows:- (I) The compensation was assessed in the year of receipt but the taxable amount was initially reduced by 25 per cent. (II) The remaining 75 per cent was reduced by a further 20 per cent or IR£ 10,000 whichever was the greater. Again the industry points to the above concessionary tax treatment and would argue for it's application to the proposed Decommissioning Scheme (C) Decommissioning Compensation - Spread of Taxation Liabilities There are numerous examples of concessions granted in relation to spread of any taxation liabilities regarding payment schemes as follows:- (I) Single Farm Payments received under decoupling arrangements may be spread over three years where a single payment referred to above and another subsidy fall to be taxed in 2005. In such circumstances payments may be spread over the three years 2005, 2006 and 2007 for taxation purposes. (Reference Section 657 A TCA 1997). (II) Eligible applicants under the Salmon Hardship Scheme 2007 may opt to receive payments and account for tax on any taxable element in three equal amounts over the years 2007 to 2009. (Reference Revenue Tax Briefing No. 66) (III) Special relief applies for farmers in respect of profits arising from the disposal of livestock due to statutory disease eradication measures. The relief provides for the options to account for tax in respect of the said sums over a three year period or four year period. (Reference Sections 665-669 TCA 1997) In summary we believe that the application of significant taxation concessions will be crucial to the ultimate success and take-up of the proposed 2007 Decommissioning Scheme. It will not be logical or viable for potential claimants if the net decommissioning proceeds after any tax payable will not discharge outstanding encumbered bank and other debts. We would stress that in order for the proposed Scheme to be a success, the potential applicants to the Scheme must not only be in a position to exit on a debt free basis but must have sufficient available funds remaining to provide for diversification into alternative activities or ultimate retirement. We note that BIM have commissioned an Information Note on the tax implications of the proposed Scheme based on existing Revenue policy and interpretation. This Information Report included a number of worked examples of liabilities to taxation. We perceive these as useful examples highlighting potential significant tax charges. However we enclose herewith further worked example taking account of some of the circumstances outlined in this Report as above. The Report on Strategy for a Restructured Sustainable and Profitable Irish Seafood Industry 2007-2013 has called for a significant restructuring and decommissioning programme to be implemented for the Irish fishing industry. All parties associated with the industry agree that this strategy and recommendation is crucial to the future viability and profitability of the sector. Such is an industry which provides vital financial support and activity in many disadvantaged areas of our island. These areas have limited means of developing alternative sustainable economic activities. Hence the importance of successfully implementing the proposed Decommissioning Scheme 2007. All parties involved must therefore ensure that the proposed Scheme does not fail because of the failure to acknowledge and recognise the importance of granting taxation concessions to the targeted applicants in this instance. The Scheme must ensure that every encouragement both financial and otherwise is provided to those engaged in the industry to exit and seek alternative means or retirement. Based on the above facts, we believe that there are sufficient grounds to grant tax exempt status to the proposed compensation receivable under the Decommissioning Scheme 2007. We estimate that the maximum cost to the Exchequer in granting full tax exemption status will amount to circa €13 million. This we believe is a relatively small cost to ensure the success of the proposed Scheme and the very future viability of the fishing industry in Ireland. We will be glad to discuss the above in further detail as required. Yours Faithfully, Ciaran Baxter BAXTER & ASSOCIATES Example Fisherman / Vessel owner Aged 53 Vessel 22 meters and 23 years old 159 GT's 403 Kws Decommissioning Payments Purchased vessel in 1996 for Cost of Tonnage / Additional Tonnage Capital Allowances Left of € 926,192 € 400,000 €Nil €Nil Split of Decommissioning Proceeds € 926.192 x 400,000 = 400,000 € 926, 192 (vessel) € 926.1 92 x Nil = 400,000 € Nil (Tonnage) Vessel Sale Proceeds / Decommissioning Cost 1996-97 €400,000 Indexation Factor 1.251 € 926,192 (€ 500,400) Gain € 425,792 CGT@20% € 85,158 Balancing Charge Proceeds TWDV of boat Balancing Charge Restrict to Allowances Granted € 926,192 € Nil € 926,192 € 400,000 Income Tax @ 46.50% € 186,000 Total Tax Payable C.G. T - vessel Income Tax - vessel CGT - Tonnage € 85,158 € 186,000 € Nil Total Payable € 271,158 ------