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Lenihan Outlines Raft Of Tax Changes In Irish Finance Bill

Monday, February 8, 2010

Irish Finance Minister, Brian Lenihan has published the Finance Bill 2010, which gives effect to numerous taxation measures announced in last December’s budget, including a 0.5% cut in value-added tax and the introduction of a 'domicile levy'.

Speaking on the release of the Finance Bill, Lenihan stated that:

“This Bill strikes a balance between providing targeted support to enterprise to assist in our economic recovery and enhancing the ability of the Revenue Commissioners to carry out their work. It also ensures that all sectors play their part in stabilising the public finances and thereby restoring domestic and international confidence in our economy.”

He continued: “In the last budget, the government chose to reduce expenditure rather than increase taxes, on the basis that tackling the cost of running the state is the most effective strategy for returning the economy to growth.”

“By addressing our cost base in the successive budgets over the past 18 months, we have improved our competitive position and gained market share."

"The pro-enterprise taxation measures in this Bill will build on our existing strengths and will put us in the position to take advantage of the recovery that my Department and the Central Bank are forecasting for the end of this year.”

“These measures, together with our budgetary strategy, will create and protect jobs by supporting export led growth in services and goods.”

The Bill, which must be enacted by April 9, gives effect to the following measures, initially announced on budget day:

  • The introduction of a Carbon Tax at a rate of EUR15 per tonne is being introduced on fossil fuels. This applied to petrol and auto-diesel with effect from midnight December 9 2009; and will apply from May 1, 2010, to kerosene, marked gas oil, liquid petroleum gas (LPG), fuel oil and natural gas. The application of the tax to coal and commercial peat is subject to a Commencement Order.
  • Measures are introduced to cover a Car Scrappage Scheme from January 1 to December 31 2010; expansion of the existing VRT exemption for Electric Vehicles until December 31, 2012; and expansion of the existing VRT relief scheme (up to EUR2,500) for Plug-in Hybrid Electric Vehicles until December 31, 2012.
  • A reduction in the standard rate of VAT from 21.5% to 21% has come into effect from January 1, 2010; this reduction applies to all goods and services which had been subject to VAT at 21.5%.
  • Extension of Mortgage Interest Relief is put in place for qualifying loans whose entitlement to mortgage interest relief ends in 2010 or after to continue to qualify for relief at the applicable rate up to end 2017. Qualifying loans taken out before December 31, 2011, will continue to get relief at current rates until end 2017. Transitional measures are provided for qualifying loans taken out after December 2011 and end-2012 where relief will be provided at reduced rates and duration. Mortgage interest relief will be abolished entirely for the tax year 2018 and subsequent years.
  • Introduction of a Domicile Levy of EUR200,000 (approx USD273,210) on all Irish-domiciled individuals who are Irish citizens. The Levy will apply to wealthy Irish-domiciled individuals with Irish-located capital greater than EUR5m, worldwide income in excess of EUR1m, and a current Irish income tax liability of less than EUR200,000. Persons liable to the levy will have to pay it regardless of where they live or where they are tax resident.
  • An increase in the effective income tax rate paid by those subject to the restriction of reliefs. Taxpayers availing of specified reliefs will now become subject to the restriction at an adjusted income level of EUR125,000 (down from EUR250,000) and where adjusted income reaches EUR400,000 (down from EUR500,000), taxpayers will now be subject to the full restriction and pay an effective income tax rate of 30% (up from 20%). In order to achieve the new effective income tax rate, it has been necessary to implement a specified relief threshold of EUR80,000 (down from EUR250,000).
  • There has been an extension of the existing scheme of tax exemption on the income and gains of new start-up companies over the first three years of operation to companies which begin trading in 2010.
  • The scope of the existing scheme of capital allowances for energy-efficient equipment is being extended to cover an additional three categories of technology (refrigeration and cooling systems, electro-mechanical systems and catering and hospitality equipment), bringing the total number of categories to 10.

The Minister highlighted a number of the other new measures in the Finance Bill. These included:

  • Provision of tax measures to facilitate the the development of Islamic finance in Ireland, covering any financing arrangement that is compliant with the principles of Shari’a law. The tax treatment applicable to conventional finance transactions will be extended to embrace Islamic finance.
  • Introduction of a package of reforms relating to Capital Acquisitions Tax (CAT) to modernise and simplify the CAT regime, while delivering immediate and significant benefits to taxpayers, their legal advisers and the Revenue Commissioners.
  • Provisions relating to the approval of institutions for the purposes of health expenses relief are being amended so as to remove the requirement that they must be approved before tax relief on expenses incurred in such institutions can be allowed. These institutions are mainly nursing homes (located in Ireland and abroad) and foreign based hospitals. The relief is being refocused on expenses incurred by or on the advice of a medical practitioner.
  • The Life Insurance Levy, introduced in Finance Act 2009, is being removed from pension products in order not to discourage pension investment.
  • The existing R&D tax credit is being amended to cover situations where a company carries out R&D activities in different facilities in separate geographical locations, and the activities in one of those facilities is permanently discontinued.
  • The tax treatment of dividends received by companies in Ireland is being amended to increase the attractiveness of the country's tax regime in this area.

    The amendments involve (i) charging tax at 12.5% (instead of 25%) on foreign dividends paid out of trading profits in relation to countries with which Ireland does not have a tax treaty; (ii) simplifying the arrangements under which foreign dividends are treated as sourced from trading or non-trading profits; (iii) providing tax exemption to foreign dividends forming trading income from portfolio investments (holdings of less than 5%, primarily insurance companies);

  • Extension of unilateral credit relief in respect of withholding taxes on royalty income from non-treaty countries to all trading companies. Companies currently entitled to manufacturing relief are also entitled to unilateral credit relief in respect of withholding taxes on royalty income from non-treaty countries but this ends on December 31, 2010, as part of the closure of the 10% Corporate Tax Manufacturing regime.
  • Enhancement of the capital allowance scheme for intangible assets which was introduced in Finance Act 2009 to improve its effectiveness.
  • The Remittance Scheme introduced in Finance (No.2) Act 2008 is being enhanced to improve Ireland’s ability to attract highly skilled individuals capable of acting as ‘magnets’ to attract economic activity. The scheme will now cover both European Union and European Economic Area nationals, while the condition that persons covered by the scheme must remain in Ireland for a minimum of 3 years is reduced to 1 year.
  • A package of measures is being introduced to improve the attractiveness of Ireland as a base for internationally-traded services, particularly financial services. These include: exemption from completion of non-resident declarations for foreign investors in Irish domiciled funds that are not marketed within Ireland; more clarity with regard to the tax treatment that would apply to foreign funds that are managed from Ireland under the recently adopted UCITS IV (Undertakings for Collective Investments in Transferable Securities) Directive provides for the establishment and operation of a UCITS ‘Management Company Passport; extension of stamp duty to accommodate mergers of investment undertakings.
  • Measures are being introduced across the tax regime to ensure that Exchequer receipts are not eroded by the use of tax avoidance schemes.
  • Provisions are being introduced to abolish a number of tax expenditures in line with the recommendations of the Report of the Commission on Taxation. These include:
    • Relief available to ‘passive’ investors under the Significant Buildings and Gardens Scheme.
    • Gifts of property to the state.
    • BIK exemption of employer-provided art objects.
    • Tax relief on service charges. This will come into effect in 2012 and will mean that charges paid in 2010 can be claimed against tax in 2011.
    • Capital Allowances for childcare facilities.
    • Relief for long-term care policies.
  • The Windfall Tax, introduced as part of the NAMA (National Asset Management Agency) legislation, is being amended and extended.
  • A revised classification system for the registration of vehicles is being introduced from January 1, 2011. The new system will reflect the categories used for vehicle classification at European level under a number of Directives.
  • Lastly, the 2010 Finance Bill provides for the ratification of a further six Double Taxation Treaties (DTAs) between Ireland and: Bahrain, Belarus, Bosnia and Herzegovina, Georgia, Moldova and Serbia.