14 Oct 2015 | 10.47 am
Budget 2016: Business Tax
Experts from KPMG detail the Budget 2016 measures affecting business
14 Oct 2015 | 10.47 am
By Orla Gavin, Jim Clery, Conor O’Sullivan, Ken Hardy, Marie Armstrong and Liam Lynch, Partners at KPMG
Foreign Direct Investment
The Budget and the ‘Update on Ireland’s International Tax Strategy 2015’ (Tax Strategy Update) released by the minister continue to build on Ireland’s corporation tax policies aimed at attracting and retaining foreign direct investment. The minister repeated the Government’s commitment to offering a best in class, transparent and competitive corporation tax regime.
The Tax Strategy Update reaffirms that the 12.5% corporation tax rate is the cornerstone of Ireland’s tax strategy and that it will be unaffected by the ongoing international tax developments under the OECD BEPS project.
The minister announced the introduction of the Knowledge Development Box (KDB), which will be legislated for in the forthcoming Finance Bill. The KDB is aimed at incentivising innovative activities and its introduction demonstrates Ireland’s commitment to offering companies a “best in class” corporation tax regime.
The minister confirmed that the KDB will be the first OECD-compliant preferential tax regime in the world with the regime following the “modified nexus” approach endorsed by the OECD. The “modified nexus” approach seeks to link the relief under the KDB to the proportion of qualifying R&D expenditure being carried on by the company in Ireland on that innovation. The corporation tax rate for income qualifying for relief under the KDB was confirmed as 6.25%.
Whilst the introduction of the KDB may be a positive addition to Ireland’s corporation tax offering, its impact is expected to be limited for multinational groups who typically undertake research and development activities globally.
International Tax Strategy
The Tax Strategy Update provides an outline of the progress and developments since the publication of Ireland’s International Tax Strategy in Budget 2014 which was followed in Budget 2015 by a Road Map for Ireland’s Tax Competitiveness. The publication gives details of the developments under each of the international tax policy commitments made in the previous two Budgets.
The Tax Strategy Update also includes a statement on the status of Ireland’s compliance with the OECD BEPS project. The key points from this statement are as follows:
• As widely expected, the minister confirmed that the Finance Bill will contain legislation to introduce country-by-country reporting in accordance with the OECD standards
• As outlined above, the proposed KDB will be the first OECD-complaint box in the world and is in line with the recommendations of the BEPS project
• It was confirmed that Ireland will seek to introduce the updated OECD transfer pricing guidelines into Irish law once approved by the OECD in 2016
• It was confirmed that the Government will continue to engage constructively with international developments on other BEPS actions, including the agreement of a multilateral instrument (the mechanism by which double tax treaties will be amended), controlled foreign corporation rules, interest deductibility and hybrid mismatches
The Tax Strategy Update also outlines the Government’s position on the EU agenda on tax policy matters. The Government confirms its continued engagement and support for many EU initiatives on improving transparency and automatic sharing of information by tax authorities. However, the Government does not support any initiatives seeking to enforce harmonisation of tax rates or minimum tax thresholds among Member States.
The minister also announced the release of a Spillover Analysis assessing the impact of Ireland’s tax system on developing countries – only the second country to do so. Last year, the minister recommended to the OECD that, as part of the BEPS project, each member country undertake a similar spillover analysis to determine the impact of their respective tax systems on developing countries.
The minister confirmed Ireland’s intention to promote tax policies which support developing countries to raise tax revenues domestically and to foster good governance and equitable development of such economies.
The conclusion of the spillover analysis was broadly positive in its assessment of the impact of Ireland’s tax system on developing economies. The areas of concern related to certain provisions of old international tax treaties with Zambia and Pakistan. As these treaties were already being renegotiated, replacement treaties have been signed and are being ratified.
Employment and Investment Incentive (EII)
Finance Act 2014 included amendments to the tax regime for income tax relief for investments made in certain qualifying companies. The introduction of these measures was subject to a Ministerial Order until EU clearance was obtained. As this has been obtained, the minister has appointed Budget Day as the effective date of the amendments for shares issued on or after that date.
The principal measures applicable as and from Budget Day are as follows:
• an increase in the amount of finance that can be raised by qualifying companies over a 12 month period from €2.5 million to €5 million and an increase in the amount of finance that can be raised over the lifetime of a company from €10 million to €15 million
• an increase in the minimum holding period for which investors are required to hold their shares to avoid a clawback of the relief from three years to four years
• an extension of the scope of the relief to include medium sized companies operating in non-assisted areas (such as Dublin and Cork city), certain internationally traded financial services and the operation of nursing homes
• companies involved in internationally traded financial services must obtain certification from Enterprise Ireland in order to qualify for the relief
• any claim for EII relief will not be allowed unless, at the time the claim is made, the company in which the investment is made qualifies for a tax clearance certificate.
In addition to the above measures, the scheme is being expanded so that investments used by companies operating nursing homes to enlarge their capacity will qualify for relief. The nursing home must meet a number of specific conditions. In particular, this expansion of the relief will not apply to an investment in a nursing home which is subject to certain option arrangements for its repurchase. The money raised for this purpose must also be spent within a certain timeframe by the company.
Finally, for shares issued on or after Budget Day, SME companies must meet certain requirements set out in EU Regulations concerning State Aid in order for an investor in such companies to qualify for relief.
Relief from corporation tax for certain start-up companies
The three-year relief from corporation tax for certain trades, introduced in 2009, will be extended by three years. It will therefore benefit trades commenced before 31 December 2018.
The measure applies where a company’s annual corporation tax liability on qualifying income and gains in the first three years of trading does not exceed €40,000 (with marginal relief also available up to a corporation tax liability of €60,000). The relief is capped at the amount of employer’s PRSI paid in the period.
A review of the operation of the relief was announced in last year’s Budget speech, and the output of that review has now been published in the Department of Finance’s “Tax and Entrepreneurship Review”.
As part of the review, the Department of Finance invited views from the public and interested parties on the use and effectiveness of this relief. In the report, limitations on the benefits of relief, due to the link with employer’s PRSI contributed, were acknowledged. However this restriction has not been removed.
Increasing the supply of residential housing
It is well understood that supply constraints in the residential housing market, particularly in the greater Dublin area, have resulted in increased house prices and rents. This has had a significant impact on the affordability and availability of housing. The minister confirmed the Government’s commitment to increase supply by 2020 in a sustainable manner by drawing on the resources available to NAMA and by investing in social housing.
In a study conducted by the ESRI in relation to the suitability of tax breaks to increase the supply of residential units, key factors which led to the shortage of housing were identified. These were planning, infrastructure, finance for builders, regulations and the cost of building. Due to uncertainty in relation to the influence of the first three factors the ESRI study concluded that “caution should be exercised in the use of tax breaks in the residential property market”.
As an alternative to implementing tax breaks at this juncture, the Government have turned to NAMA to deliver a target of 20,000 residential units before the end of 2020. Collateral published with the Budget indicates that 90 per cent of units will be in the greater Dublin area, and about 75 per cent of units will be houses, mainly starter homes. NAMA is expected to deliver these units by working with developers.
In addition, a range of measures and expenditures are set out dealing with social housing and combatting homelessness.
Farming and Agribusiness
Farm Transfer Partnerships
In line with recent policies to promote the early inter-generational transfer of farms, the minister has announced a new income tax relief for farming partnerships of up to €5,000 per annum for five years. The relief is allocated between the partners in the farming partnership based on their profit sharing agreement. The partnership can extend up to 10 years, at the end of which the farm must be transferred to the younger farmer.
The relief was proposed by the IFA in their pre-budget submission in July 2015 and is designed to relieve the burden of insufficient income from the farm for two families relying on the same farm. Details of the scheme will be included in the Finance Bill and is subject to EU state aid approval.
Extension of existing Agri-tax reliefs to 2018
In continued recognition of the importance of the agriculture and food sectors to the Irish economy, various tax reliefs for farmers were extended for a further three years to 2018.
The reliefs include general stock relief, stock relief for young trained farmers and stock relief for registered farm partnerships. Stock relief is available only to farming trades and is a relief given in respect of increases in the value of farm trading stock. It is calculated by reference to the increase in value of the stock between the beginning and end of an accounting period.
The minister also announced the extension of stamp duty relief for farm transfers to young trained farmers under the age of 35 for a further three years to 2018.
Profits from the occupation of woodlands
Profits or gains from the occupation of woodland in the State that is managed on a commercial basis with a view to profit are exempt from income tax and corporation tax (but not USC and PRSI).
The exemption for woodland profits was subject to the High Income Earner Restriction (HIER) which restricts tax reliefs so that the minimum tax rate for an individual is 30%. The Budget proposes a new measure to remove profits from the occupation of woodlands from the list of tax reliefs subject to the HIER.
Last year the minister singled out the marine as a key area for further growth, with a target of doubling the value of Ireland’s blue economy by 2030. An independent review of marine taxation supports was published with the Budget. It will be examined by the relevant departments, with a view to establishing the feasibility of their implementation in future Budgets.
The recommendations, set out below, provide for the extension of some reliefs and the introduction of others, together with overall recommendations to assist the marine sector. Many of these measures will require EU approval.
To incentivise investment in ports and port equipment, an improved capital allowances regime is proposed by extending the definition of qualifying dock undertakings and potentially allowing capital allowances over a seven year period. A wider definition of what constitutes “plant” in the context of ports is also proposed.
To promote Ireland as an international shipping and ship finance centre, the proposals include the introduction of enhanced trust certificates as a form of asset backed security, a range of measures designed to ensure that Ireland’s tonnage tax regime retains its competitive status within the EU, and an extension of a VAT rebate scheme for commercial ships registered in the EU.
Fishing, aquaculture, seafood processing
A range of measures are proposed to deal with the investment, employment and succession issues in this industry. These include the extension of the Employment Investment Incentive, the Start Up Refunds for Entrepreneurs Scheme, the seafarers’ tax allowance and relief from capital acquisitions tax.