1. General economic update
Ireland’s finance minister recently presented Finance Bill 2014 to the Irish parliament. While it could be regarded as yet another “austerity Bill” (the eighth in the last six years), the Bill proposes less fiscal pain than originally planned. Since 2008, successive Irish governments have taken €30 billion ($42 billion) out of the Irish economy in spending cuts and tax rises. This amounts to 17% of today’s GDP. The government hopes that this is the beginning of the end of austerity as Ireland leaves the IMF/EU programme in December 2013. Since 2010 Irish governments have met all of the targets set by the troika of international lenders. Yields on ten-year Irish sovereign bonds have fallen below 4%, the economy moved out of recession in the second quarter of 2013, with 2% GDP growth forecast for 2014. Unemployment, which peaked at over 15% in 2012, fell to 12.5% in September 2013, helped by high levels of emigration and increased jobs growth.
2. Irish taxation update
2.1 Finance Bill 2014
The Irish Finance Minister has also recently reaffirmed the Irish government’s commitment to Ireland’s 12.5% corporation tax rate. Specifically he stated that “The tax rate is settled policy. We are 100% committed to the 12.5% corporation tax rate. This will not change”. He went on to say that “Countries are increasingly competing more and more aggressively for mobile foreign direct investment. I want Ireland to play fair - as we have always done - and I want Ireland to play to win. That is why I will continue to examine ways in which Ireland can ensure that our corporate tax regime remains competitive”. This unequivocal commitment is good news and is warmly welcomed by all businesses operating in Ireland, both domestic and foreign multinational.
The Finance Bill 2014 is currently making its way through parliament. The Bill contains a few interesting measures from an international tax perspective. In recognition of international concerns, the Bill introduces provisions to deal with so called “stateless” companies, to ensure that Irish incorporated companies must be tax resident in some jurisdiction. Under current law, Ireland has both a central management and control test and an incorporation test for corporate tax residence.
Following the Bill, this remains the case, but the incorporation test has been expanded. A company with its central management and control in Ireland is regarded as Irish resident regardless of its place of incorporation. This has not changed. A company incorporated in Ireland is in principle Irish resident but there is an exclusion from this in certain circumstances where the Irish incorporated company carries on, or is related to a company that carries on, a trade in Ireland. Therefore, in circumstances where an Irish incorporated company fell within this exclusion, and was not centrally managed and controlled in Ireland, it would not have been Irish tax resident. If the country in which the Irish incorporated company was managed and controlled solely operated an incorporation test for residence (and not an additional central management and control test), the company was not resident in that country either and could therefore be “stateless”.
This mismatch between company residence rules (as exists between Ireland and the USA for example) was regarded as undesirable, and hence the proposed amendment. The Bill proposes that an Irish incorporated company will now be regarded as Irish tax resident if it is managed and controlled in an EU Member State or in a country with which Ireland has a double tax agreement, and that country has a place of incorporation test but not a central management and control test.
While covering very specific circumstances, it is important to note that Irish incorporated companies which are centrally managed and controlled in, say, Bermuda or the Cayman Islands, and which would have been non-resident in Ireland under the pre-existing rules, will remain non-resident in Ireland for tax purposes. The new provision applies to all companies which are incorporated in Ireland from 24 October 2013, and to existing Irish incorporated companies from 1 January 2015 onwards. This means that companies which fit into this specific fact pattern will need to review their position and have 14 months to do so.
On a separate matter, Irish tax law provides for an “exit tax” where certain companies cease to be resident in Ireland for tax purposes. There is however an exemption for companies which are, broadly speaking, ultimately controlled by tax treaty residents and not by Irish residents. Where this charge applies, the migrating company is deemed to have disposed of its capital assets at market value, apart from those which remain within the Irish tax net by virtue of being used in a continuing trade in Ireland carried out through a branch. Following on from various European Court of Justice cases, which considered similar regimes elsewhere in Europe, the Bill proposes amending the exit tax regime. An optional election to defer in certain circumstances, what would otherwise be an immediate payment of tax is to be introduced. The immediate charge may be deferred and paid over six years in equal installments or alternatively within 60 days of the actual disposal of the migrated assets. In any event all deferred tax is payable on or within ten years of migration.
The Finance Bill contains a number of technical amendments to double taxation relief for companies. Changes are also proposed to limit the amount of the deduction available for foreign taxes borne on royalty and interest income from countries with which Ireland does not have a double taxation agreement and for which credit relief is not available. The effect of the changes will be to limit the amount of the deduction for the unrelieved foreign tax to the taxable amount of interest or royalty income so that a loss cannot be created or augmented for tax purposes. These changes apply to accounting periods beginning on or after 1 January 2014.
Under current Irish tax law, companies can surrender tax losses to each other when they are within a “tax group”. If the parent company of the group is not tax resident in the European Union or in a country with which Ireland has a tax treaty, group treatment may still qualify if it is quoted on certain stock exchanges. A technical amendment is proposed in the Bill to clarify that a subsidiary of such a quoted company may form part of the group where it is held indirectly as opposed to directly.
2.2 Ireland’s International Tax Strategy
The Irish government used the occasion of its mid-October Budget statement to also publish what it terms Ireland’s International Tax Strategy. The strategy sets out Ireland’s international tax objectives which are as follows:
- Ireland is committed to maintaining an open, transparent, stable, and competitive corporate tax regime
- Ireland is committed to full exchange of tax information with its tax treaty partners
- Ireland is committed to global automatic exchange of tax information, in line with existing and emerging EU and OECD rules
- Ireland is committed to actively contribute to the OECD and EU efforts to tackle harmful tax competition
- Ireland is committed to engage constructively and respectfully with developing countries in relation to tax matters including by offering assistance wherever possible
The strategy seeks to reaffirm both the Irish government’s commitment to use taxation policy to attract inward investment and boost economic activity, at the same time ensuring that Ireland’s international tax reputation remains beyond reproach.
2.3 Ireland’s R&D tax credit regime
Ireland has an R&D tax credit regime which was first introduced in 2004. In brief, the regime operates by providing a tax credit of 25% of the incremental expenditure on qualifying R&D expenditure. The credit is available for offset against a company’s corporation tax liability in the year in which it was incurred, and unused credits may be carried forward or backward, and are refundable in certain circumstances.
In 2012 the Irish government commissioned a study to gauge the effectiveness of the tax credit regime, and how it compared with R&D tax credit regimes in other countries. The study has now been completed and a report with its findings was recently published. It makes for interesting reading and from an international perspective the following points are noteworthy:
- In total, estimated expenditure for firms in Ireland in 2012 was €1.96 billion. Of this, approximately 88% of R&D expenditure was incurred on current expenditure (such as wages of R&D staff) and 12% incurred on capital expenditure (such as buildings, equipment, licence payments).
- The tax credit supports over 1,400 companies that, between them, employ nearly 150,000 people and have turnover of nearly €100 billion.
- In terms of international comparisons, the report notes that there is no such thing as a perfect “one-size-fits-all tax incentive for R&D” that would suit all countries and all firms. The report concludes that the Irish regime “at least matches the international benchmarks, and is among the most favourable in respect of certain elements”.
- The fact that the Irish tax credit is available to all corporate taxpayers operating in Ireland, regardless of the size of the firm or sector in which they operate is an asset for a small nation with an open economy.
- The importance of the R&D tax credit regime in attracting mobile Foreign Direct Investment (“FDI”) into Ireland is significant. In FDI terms, the principal benefit of the R&D tax credit is that it reduces the costs of undertaking R&D in Ireland by 25%. This is because the credit may be treated as a grant for accounting purposes, and this enables a company to account for it as income “above the line” in its financial statements. This feature is crucial to the success of Irish subsidiaries of multinational companies (“MNCs”) in competing to win R&D projects against subsidiaries in other jurisdictions. Because the value of the credit can be accounted for above the line, it enables an Irish subsidiary to pitch for R&D projects on the basis of 75% of actual cost per head of conducting R&D in Ireland. This helps to mitigate a natural bias whereby MNCs may otherwise tend to locate high-cost activities (such as R&D) in high-tax jurisdictions in order to benefit to the greatest possible extent from the associated expense deductions. There is qualitative evidence that the R&D Tax Credit has assisted some traditional manufacturing companies in moving up the value chain and winning R&D investment from parent companies which can, in turn, act to further embed the manufacturing activity in Ireland.
- The breakdown of respondents to the survey indicated that the dominant economic sectors in which R&D claimant companies operate are manufacturing (46.1%) and Information and Communications Technology (23%).
- Where an Irish subsidiary of an MNC had competed and won an R&D project, 85% of respondents to a survey contained with the study stated that the R&D tax credit had played a part in the win.
- The introduction of the payable credit in 2009 has significantly increased the attractiveness of the regime as it allowed recipients to monetise unused credits (due to insufficiency of profits, subject to certain limits) over a three-year period.
There is a considerable variation in the rate given for R&D tax credits in the jurisdictions examined, from 7% to 50%. Most countries have a general rate within the 10 - 30% range but these are typically qualified by additional restrictions/eligibility criteria. Only two countries have a single rate applied with no restrictions. The combination of the 25% rate in Ireland, the flexibility afforded by the payable credit and the relative simplicity of the Irish regime confirms previous independent research that the Irish R&D Tax Credit is among the “best in class” internationally.
3. Ireland as an FDI location
Ireland has just been named as the “best country for business” in rankings carried out by renowned US financial magazine Forbes. Ireland has moved up from sixth position in the influential rankings in 2012. The rankings are determined by grading 145 nations on 11 different factors - property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance.
Highlights of Forbes conclusions are as follows:
- Despite its economic troubles, Ireland still maintains an extremely pro-business environment that has attracted investments by some of the world’s biggest companies over the past decade
- Ireland scores well across the board when measuring its business friendliness. It is the only nation that ranks among the top 15 per cent of countries in every one of the 11 metrics we examined to gauge the best countries
- Ireland ranked “near the very top” for low tax burden, investor protection and personal freedom.
- Ireland’s “educated workforce” and 12.5% corporate tax rate are described as “big draws” for companies.
- The article acknowledges that Ireland has already established itself as a location for MNCs, and so has the necessary infrastructure for other companies to easily move into the country and set Irish operations.
Like many countries, particularly in Europe, Ireland has faced significant economic challenges and obstacles since the onset of the global recession in 2008. Much hard work has been done and many sacrifices have been made by the Irish public. However signs for cautious optimism exist about Ireland’s future in the medium to longer term.
From a tax perspective, Ireland’s corporation tax regime remains robust and competitive and due to policies from successive governments of all political persuasions, it should remain so in the long term. The Forbes conclusions are evidence of Ireland’s continuing attractiveness as an investment location.