www.pwc.ie/financeact

Getting the balance right? Finance Act 2015 December 2015

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Table of contents

Welcome

3

Introduction

4

Private Business

6

Foreign Direct Investment (FDI)

8

Large Irish Corporates and PLCs

10

Country by Country Reporting

12

Agri Sector

14

Property

16

Pensions

18

Employment Taxes/Individual Taxes

20

Financial Services

22

Oil and Gas

24

VAT

26

Excise Duty

28

Tax Compliance & Administrative Matters

30

Welcome

Joe Tynan +353 1 792 6399 [email protected] The recent publication by the OECD of its final BEPS papers is a reminder of the context in which Finance Bill 2015 was drafted and the pace at which the global tax system continues to undergo unprecedented change. There is a general move towards seeking better alignment of taxing rights with substance and with this in mind, Ireland has sought to continue to position itself as being an attractive jurisdiction with a tax system that is globally accepted as being open, transparent, fair and competitive. This ambition is demonstrated by the addition of the world’s first BEPS compliant Knowledge Development Box (KDB) to the existing suite of corporate tax measures, however the potency of this new relief fell somewhat short of expectations. The introduction of legislation providing for Country by Country Reporting (CbCR) is likely to present challenges for multinational groups with periods beginning from 1 January 2016 and early engagement is key.

From the perspective of indigenous business the incentives for entrepreneurs and the Knowledge Development Box should encourage domestic business growth. The Finance Bill confirms the Budget announcement signalling an improvement for the tax situation for workers, particularly low to middle income earners. The relatively high marginal rate of tax on income remains in place for now. However, it is to be welcomed that the position in relation to directors travelling expenses has now been clarified. Finance Bill 2015 demonstrates that the BEPS era brings challenges to both tax policy makers and global businesses alike. However, it also presents opportunities for countries such as Ireland to put itself forward as an attractive proposition from which to do business on the global stage.

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Introduction

Fiona Carney +353 1 792 6095 [email protected]

This year’s Finance Bill is short but it does contain a number of significant measures additional to those announced by Minister Noonan in last week’s Budget. From a personal tax perspective, the principal changes are in the form of adjustments to the USC thresholds and rates. Additional measures were included in the Finance Bill to provide an exemption from USC for employees on employer contributions to a PRSA, which is very welcome news and brings the treatment of such contributions into line with employer contributions to occupational pension schemes. The Bill also provides for exemption from income tax, USC and PRSI for vouched travel and subsistence expenses incurred by non-resident non-executive directors attending meetings in their capacity as directors.

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Stephen Ruane +353 1 792 6692 [email protected]

The measures brought in to assist entrepreneurs are consistent with the Government’s stated objective of promoting entrepreneurship. These measures include a decrease in the CGT rate from 33% to 20% for business disposals. However, this is subject to a lifetime limit of €1 million which is far lower than similar incentives provided overseas. The Finance Bill also enacts the commencement of measures previously announced in respect of the Enterprise Investment Incentive Scheme to comply with State Aid rules while also confirming that expansion works to existing nursing homes will qualify for relief under the scheme. The corporation tax relief for start-up companies has also been extended for a further three years.

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 bring petroleum companies and companies in a range of other industries (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 country level. Ireland has engaged in this process at an early stage. To enhance the transparency of the Irish tax system, and in line with OECD recommendations, the Government has introduced Country by Country Reporting (CbCR) obligations in this Finance Bill, applying to Irishparented multinational groups with consolidated revenues of €750 million or more. These provisions (together with the wider OECD Transfer Pricing Documentation requirements) will fundamentally change the way in which multinational groups must document intercompany transactions and will create a significant administrative burden for them. It will also contribute to the growing trend towards the sharing of information between tax authorities.

The Knowledge Development Box (KDB), introduced in this Finance Bill, is the first and only innovation box in the OECD region which is BEPS compliant. It provides an effective 6.25% corporation tax rate on profits arising from qualifying assets (including copyrighted software and patented inventions) where some or all of the related R&D is undertaken by the Irish company. The regime is expected to be of most benefit to companies undertaking significant R&D in Ireland.

The introduction of a provision specifying who qualifies for the VAT exemption in respect of educational services, and which enables Revenue to make a determination that a specified educational activity should be subject to VAT where its exemption creates a distortion of competition, may add a further layer of uncertainty in an already complicated area. There has also been an extension of the VAT exemption for certain bets and commissions in the online gambling industry.

The Finance Bill also contains a number of anti-avoidance provisions which are targeted at perceived abuses of existing legislative measures in the areas of Capital Gains Tax and VAT. The measures include the expansion of the existing “transfer of assets abroad” anti-avoidance legislation, a new bona fide test for company amalgamation or reconstruction relief and measures altering the tax treatment of restrictive covenant payments made to 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 antiavoidance provisions, will be extended to this new provision.

Overall, the Finance Bill contains measures which should stimulate the domestic economy and which demonstrate our ongoing policy of engagement with the international tax agenda. The Bill was amended in a number of respects prior to its enactment on 21 December 2015. The amendments made are highlighted in dark red text throughout this document.

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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 +353 1 792 6126 [email protected]

Employment and Investment Incentive (‘EII’) The Finance Bill has the effect of enacting the provisions included in Finance Act 2014 with respect to share issues made on or after 13 October 2015. Broadly, these increase the annual and overall investment limits for a company to €5million and €15million respectively and extend the required minimum holding period from 3 years to 4 years. The Bill also expands the availability of the relief to allow companies that already own and operate nursing homes to raise funds for the purposes of expanding their existing facilities. The legislation contains new requirements for a qualifying company to meet certain conditions set out in the EU Regulations. Any company which had received outline approval for EII prior to 13 October 2015, but had not raised EII funding by that date, must now consider whether or not it is a qualifying company under the amended scheme as the outline approval received may no longer be valid. Existing companies, particularly those in existence for longer than 7 years, will need to consider the EU Regulations which underpin the new relief in more detail to determine if they are eligible.

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CGT Entrepreneur Relief The Bill revises the provisions of the existing entrepreneur relief to introduce a new reduced rate of Capital Gains Tax (20%) which will apply to disposals of chargeable business assets from 1 January 2016 up to a lifetime limit of €1m. This is a welcome move from the Government; however, we would have liked to have seen a higher cap. Restrictions apply in order to ensure that beneficiaries of the relief are genuine business persons. A qualifying business for the purposes of the relief excludes businesses which consist of the holding of investments, the holding of development land or the development or letting of land. The assets must have been owned for a continuous period of not less than 3 years in the 5 years immediately prior to their disposal. Where the business is carried on by a private company, an individual holding no less than 5% of the shares in the company may qualify for the relief. The individual must have been a director or employee of the company, spending not less than 50% of their working time in the service of the company in a managerial or technical capacity for a continuous period of 3 years in the period of 5 years immediately prior to the disposal.

The relief can also apply to shares in a holding company whose business consists wholly or mainly of holding at least 51% of the shares in one or more companies carrying on a qualifying business (a ‘qualifying group’). The individual must have been a director or employee as above of one or more members of the qualifying group.

Start Up Companies Relief This relief, which was due to expire at the end of 2015, has been extended for a further 3 years such that it will apply to new business start-ups which commence in 2016, 2017 and 2018.

Earned Income Tax Credit The Bill introduces legislation to enact the new earned income tax credit. The measure provides for a tax credit, capped at €550, which applies to an individual’s earned income i.e. income which does not qualify for the employee (PAYE) tax credit. Where an individual has employment income also, the aggregate tax credits are capped at €1,650.

Film Relief The Finance Bill has increased the cap on qualifying eligible expenditure to €70million, together with making a number of technical amendments around the definition of ‘broadcaster’ for the purposes of the relief and the level of information that needs to be disclosed to bring it in line with EU guidelines.

CAT The Finance Bill legislates for an increase in the Group A tax free threshold which applies primarily for gifts / inheritances from parents to their children. The lifetime threshold has been increased from €225,000 to €280,000 for gifts and inheritances taken on or after 14 October 2015.

Anti-Avoidance Finally, the Finance Bill amended a number of existing anti-avoidance provisions in order to prevent perceived abuses of existing legislative measures. In particular a number of these may impact Private Business.

Attribution of income to Irish individuals following a transfer of assets abroad The Finance Bill expands the remit of the “transfers of assets abroad” anti-avoidance legislation contained in Section 806 TCA 1997 so that it now also applies to nondomiciled individuals who are chargeable to income tax on the remittance basis. This section is designed to counteract schemes by individuals (resident or ordinarily resident in the State) who seek to avoid a liability to income tax by means of transferring assets (usually income generating assets) overseas, the result of which is that income becomes payable to a non-resident (usually a non-resident corporate) while the resident individual continues to retain the power to enjoy the income. Attribution of gains made overseas to Irish shareholders Section 590 TCA 1997 enables Revenue attribute gains made on a disposal of assets by a non-resident company (which is deemed to be closely held – i.e. broadly, owned by 5 or fewer shareholders or participators) to the company’s Irish resident shareholder(s). This has the effect of subjecting the Irish resident who controls the company to CGT on the disposal made by the non-resident company. The Finance Bill has now amended the section such that it will not apply to gains where the disposal was made for ‘bona fide’ commercial reasons. Company reconstruction or amalgamation Currently, where a 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 company (comprising assets which are Irish chargeable assets), relief is available which defers the Capital Gains Tax (CGT) liability until such time that the assets are disposed of to an unconnected third party.

assets. Revenue indicated in the eBrief that the intention of the relief is to provide for a deferral of the CGT liability as opposed to the elimination of the charge to tax arising on the ultimate disposal of the assets. They also noted that where the relief was claimed as part of a scheme to avoid CGT, the transactions may be challenged under the general anti-avoidance provisions in the legislation. The Finance Bill now formally introduces a new anti-avoidance measure. The CGT relief referred to above will not apply unless it can be shown that the reconstruction or amalgamation is effected for bona fide commercial reasons and does not form part of an arrangement the main purpose or one of the main purposes of which is the avoidance of tax. The change will apply to disposals made on or after 22 October 2015. Restrictive covenants The Finance Bill amends Section 541B TCA 1997 which ensures that payments made under restrictive covenant-type arrangements (a payment in exchange for an individual accepting / agreeing to a restriction as to the conduct of their activities) are subject to CGT if they do not come within the scope of income tax. The amendment is aimed at circumstances whereby CGT is avoided on a payment made to a non-resident person in return for an Irish resident person entering into a restrictive covenant. The chargeable gain is now regarded as accruing to the Irish resident person and not the non-resident person with the result that it is subject to Irish CGT.

Revenue recently released eBrief 82/2015 which is aimed at countering the perceived misuse of the section, in conjunction with other provisions of the legislation, where the relief is used as part of a scheme to avoid CGT on the ultimate disposal of the

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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.

Harry Harrison +353 1 792 6646 [email protected]

Knowledge Development Box The Finance Bill introduces the Knowledge Development Box (KDB), a tax relief that will result in an effective 6.25% corporation tax rate to certain profits arising from qualifying assets (including copyrighted software and patented inventions), for accounting periods which commence on or after 1 January 2016. Qualifying profits on which the relief can be claimed are intended to reflect the proportion that the company’s R&D costs bear to its overall expenditure on the qualifying asset, with some tweaks to reflect the agreed “Modified” nexus approach. The profits are calculated using the following formula:

QE + UE x QA OE Where: QE is the qualifying expenditure on the qualifying asset UE is the uplift expenditure OE is the overall expenditure on the qualifying asset QA is the profit of the trade relating to the qualifying asset before taking account of any allowance available under this section

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‘Qualifying expenditure on qualifying assets’ is a key driver of the calculation of the profits that qualify for the relief. The definition of this qualifying expenditure is broadly aligned to the definition of ‘expenditure on research and development’ for the purposes of the R&D tax credit. In this regard, where a company develops, improves or creates a qualifying asset through qualifying R&D activities and the company makes R&D tax credit claims in relation this, the expenditure underpinning these claims should be broadly aligned to the ‘qualifying expenditure on qualifying assets’ for the purposes of the relief. There is an exception to the above in terms of expenditure incurred by a company in engaging a third party to carry on R&D activities on behalf of the company. Payments made to such third parties are regarded as qualifying expenditure for the purposes of calculating the relief whereas such payments are restricted for the purposes of the R&D tax credit. Qualifying expenditure is calculated by reference to all qualifying expenditure on the qualifying asset incurred in the previous 4 years or, from 2020, all qualifying expenditure incurred after 1 January 2016.

Costs outsourced to affiliates or costs incurred on the acquisition of the IP are not regarded as qualifying expenditure, however, such costs are allowed as “uplift expenditure” up to a combined maximum of 30% of qualifying expenditure. The tax relief provides for an allowance of 50% of the qualifying profits to be treated as a trading expense of the company, resulting in an effective 6.25% tax rate on such profits. Qualifying assets are to be treated separately for the purposes of the KDB calculations. However, if a number of qualifying assets are so interlinked that it would be impossible to provide a reasonable allocation of income and expenses, then provision is made for using a “family of assets” and treating the combined assets as a qualifying asset. Where an R&D tax credit claim has been utilised to shelter the corporation tax liability of a company for the current and preceding accounting periods and an excess credit still remains, a claim for monetisation of this excess credit can be made. The Finance Bill provides that the KDB relief cannot increase the claim for monetisation of an excess R&D tax credit, therefore, the relief cannot be taken into account for the purposes of the monetisation calculations. Where a company incurs a loss on the activities that qualify for the KDB relief, the loss would be available on a value basis against other profits.

Scientific research The Finance Bill contains two technical amendments to allowances for capital expenditure on scientific research. The first is to ensure assets are in use for the purposes of scientific research to qualify for the allowances and the second provides that capital allowances cannot also be claimed on the same expenditure under any other section.

Double tax agreements The Taxes Consolidation Act 1997 includes a schedule which lists all the international double tax agreements and tax information exchange agreements entered into by Ireland. The schedule has been amended to (i) add Ethiopia as a territory with which Ireland has a double tax agreement (ii) add new double tax agreements with Pakistan and Zambia (iii) reflect a new Protocol to an existing double tax agreement with Germany and (iv) new tax information exchange agreements with Argentina, the Bahamas and St Kitts & Nevis. The Finance Bill also includes an amendment to enable arrangements to be entered into with a non-governmental representative authority for the purpose of preventing double taxation and providing for the exchange of information, subject to approval by Dáil Ėireann.

Capital gains tax for nonresidents Non-residents are generally only liable to capital gains tax on the disposal of certain specified assets. These include Irish land and buildings, Irish mineral rights, exploration and exploitation rights in the Continental Shelf and unquoted shares deriving the greater part of their value from these assets. The Finance Bill contains a provision to counter situations whereby prior to a sale by a non-resident, cash is transferred to a company which holds such specified assets (typically Irish land or buildings), so that at the time when the shares are disposed of less than 50% of the value of those shares are derived from specified assets. The effect of the provision is that, where the main purpose or one of the main purposes of the transfer is the avoidance of tax, the value of the cash is not taken into account in determining whether the shares derive the greater part of their value from specified assets. The amendment applies to disposals made on or after 22 October 2015.

EU Parent Subsidiary Directive - Anti-Avoidance Measures Section 32 of the Finance Bill seeks to give legal effect to recent changes made at EU level to the Parent Subsidiary Directive which saw the introduction of an antiavoidance measure to the regime. The EU Parent Subsidiary Directive provides for a common system of taxation on dividends received by parent companies from their subsidiaries resident in other EU Member States. Generally speaking, the Directive requires Member States to allow subsidiaries pay dividends to their parent company free of withholding tax. Furthermore, in order to eliminate the double taxation of profits, the Directive also provides for a tax credit to be available to the parent company for underlying taxes paid by the subsidiary on the profits out of which the dividend is paid. The recent amendment to the Directive at EU level saw the introduction of a General Anti-Avoidance Rule (GAAR) and Section 32 of the Finance Bill implements that change. This brings Ireland in line with a number of other EU Member States who have already adopted the changes into their domestic legislation. The proposed measure seeks to exclude dividends paid by subsidiaries resident in Ireland from the exemption from withholding tax under the Directive where the payment forms part of an arrangement or series of arrangements the main purpose of which, or one of the main purposes of which, is obtaining a tax advantage that defeats the object or purpose of the Directive and is not genuine having regard to all the facts and circumstances. An arrangement or series of arrangements will be regarded as not genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality. Similarly, the entitlement under the 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.

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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.

Paraic Burke +353 1 792 8655 [email protected]

The exemption from income tax on vouched expenses for non-resident, non-executive 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. As announced by the Minister on Budget day, the measures introduced by Finance Bill 2015 are primarily focused on improving the tax situation for workers with the objective being to ensure that the benefits of a growing economy are felt by every family in the country. With this stated focus, one could be forgiven for thinking that Irish business has been largely ignored. However, there are a number of areas that will impact on how Irish corporates operate and which should mean that Ireland’s corporate tax regime is aligned with developments as part of the OECD’s BEPS project. The introduction of legislative proposals for Country by Country (CbC) reporting, with effect from 1 January 2016, should be of limited surprise for Irish corporates. As a result of the Finance Bill provisions, Irish headquartered multinational groups will 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

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the information required to be filed. It is intended that the reports will ultimately be shared with other tax authorities on a confidential basis. Companies who will have to file CbC reports will need to consider their overall tax strategy in light of this new filing obligation. The Knowledge Development Box will provide for a 6.25% rate of corporation tax to apply to the profits arising from qualifying intellectual property which is the result of qualifying R&D carried out by the company. While welcome, it is expected that the regime will be of limited benefit to the domestic corporate sector given the significant costs associated with investing in and generating the qualifying intellectual property, as well as the requirement to engage in substantive operations that have a high ‘value add’ for the Irish economy.

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.

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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.

Ronan Finn +353 1 792 6105 [email protected]

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. The requirement to file a CbC report will have major implications for how MNEs 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 economic pressures, and in a growing climate of austerity and focus on the contribution from business, the Organisation for Economic Co-operation and Development (OECD) issued its Action Plan regarding Base Erosion and Profit Shifting (BEPS). The two key pillars of the BEPS action plan are Substance and Transparency. From a transparency perspective, the BEPS action plan means a hugely significant increase in the level of Transfer Pricing Documentation (TPD) required, of which CbCR forms a key component. Many countries, including the UK, Australia, Spain, Netherlands, Mexico and Denmark, have already started to legislate for the introduction of CbCR. Ireland has now introduced similar legislation in this year’s Finance Bill.

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The proposed legislation will require compliance by Irish parented multinational enterprises with consolidated annualised group revenue of €750 million or more. CbCR requires organisations to file a report annually with the Irish Revenue authorities, disclosing the following data points for each tax jurisdiction in which they operate: • The amount of revenue, profit before tax, and income taxes paid and accrued. • Capital, retained earnings and tangible assets, together with the number of employees. • Identification of each entity within the group doing business in a particular tax jurisdiction, with a broad indication of its economic activity. 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.

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.

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Agri Sector

Ronan Furlong +353 53 915 2421 [email protected]

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 of farm land.

Succession Issues One of the key recommendations arising from the Agri-taxation review in 2014 was to introduce tax measures to encourage the transfer of farms to young farmers. A number of these recommendations were introduced in last year’s budget. One issue however that can cause a delay in the lifetime transfer of farms is the need for both parties to derive an income stream from the farm. To help overcome this issue, the Government is introducing a new succession farm partnership incentive. The Finance Bill provides for an extension of the existing registered farm partnership rules to allow for succession farm partnerships to be included on a register to be set by the Minister for Agriculture, Food and the Marine. The new proposals will allow for an income tax credit worth up to €5,000 per annum for up to five years to be allocated to the partnership and split according to the profit-sharing agreement. If there are no profits in the year of assessment, no tax credit would be available.

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The conditions to qualify for this relief include the following: • The partnership can have 2 or more members, must be established for a specified period of between 3 and 10 years and at the end of this specified period, at least 80% of the farm assets must be transferred to the younger farmers. • The younger farmer must not be aged over 40 when the farm partnership is set up, must have an appropriate agricultural qualification and must be entitled to at least 20% of the profits. In addition, he/she must be personally involved in the farming activities for an average of at least 10 hours per week. • The younger farmer cannot receive any share of the tax credit after 40 years of age. • The partnership can include a spouse or civil partner of the younger farmer who is not an active farmer • If the transfer does not go ahead at the end of the specified period, there would be a clawback of the income tax credits. 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

a very significant expansion of the conditions that must be met before a farm partnership can be included on the register.

• New rules to allow the appointment of Inspectors to ensure that a farm partnership is operating in accordance with the conditions for registration.

This new incentive is subject to EU state aid approval.

The Bill also introduces provisions for a right to appeal any decision by the Minister to refuse to enter a farm partnership on the register of farmer partnerships or to remove a farm partnership from the register. The Minister will be require to set out his reasons in writing to the precedent acting partner and that decision can be appealed within 21 days. The appeal will be heard by a specially appointed Appeals Officer (not the Appeal Commissioners). The decision of the Appeals Officer may be further appealed to the High Court on a point of law but that is as far as the appeal process can go. The Bill set out the rules for the appointment of an Appeals Officer and the qualifications that the person must have to serve in that role.

Transfers of farm assets to the next generation will benefit from the extension of stamp duty exemption for Young Trained Farmers to 31 December 2018 and the retention of the 90% agricultural relief from CAT. These transfers will also benefit from the increase in the gift/inheritance tax (CAT) threshold from Parent to Child from €225,000 to €280,000. This should mean that even large farm enterprises could transfer to the next generation without incurring a CAT liability when you factor in the agricultural relief of 90%.

Registered Farm Partnerships The Finance Bill contains a very significant expansion of the conditions that must be met for a farm partnership to be included on the register of farm partnerships maintained by the Minister for Agriculture Food and the Marine. Among the main changes are: • Each member of the partnership must spend at least 10 hours per week on average personally engaged in the farm activities • No partner can be a director or shareholder in a company that is also a partner in the partnership • The partnership agreement must be in writing, must comply with the Partnership Act 1890 and must commit the partners to operating as a partnership for at least 5 years (conflicts with the Succession Farm Partnership rules which stipulate a minimum of 3 years)

The tax advantage of having a registered farm partnership under current rules was an increased level of stock relief. In addition, registered farm partnerships can benefit from non-tax benefits including access to higher levels of grant assistance. While the introduction of the succession farm partnership credit has been broadly welcomed by the agriculture sector, it must be remembered that the succession tax credit for families is just €5,000 per year to be shared between all the partners. In addition, because of the increased level of conditions that must be met to be first as a registered farm partnership it remains to be seen what the uptake will be.

Anti-avoidance Income tax exemption in relation to leasing of farm land has been a feature of agri-tax for many years. Last year, the exemption for leases of 15 years or more was increased to €40,000. With effect from 1 January 2016, a lease will no longer be a qualifying lease for the purpose of the exemption if the lessee is also a qualifying lessor in relation to farm land let under a different lease. This is aimed at perceived abuses of the exemption.

Productivity Issues Stock relief is an important incentive for farmers who are building up their stocks, particularly now that milk quotas have been abolished. All available stock reliefs were extended for a further three year period up to 31 December 2018.

Forestry Income Forestry Income has been removed from the High Income Earners Restriction category.

Income Volatility No additional measures were introduced in this Finance Bill to combat income volatility. Income Averaging for farmers was increased from three to five years in last year’s Finance Act and this came into effect on 1 January 2015. Whilst this should have a long term positive impact by providing a longer timeframe over which income volatility can be smoothed, this may have a short-term negative impact on farmers in 2015 due to the significant drop in farm income currently being experienced.

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Property

Home Renovation Incentive (HRI)

Tim O’Rahilly +353 1 792 6862 [email protected]

As expected there were minimal changes in the Finance Bill in relation to property measures. Broadly these were in line with the changes announced in this month’s Budget together with a few minor, and mostly welcome, additions. The Home Renovation Incentive has been extended for a further year whilst the increased threshold for CG50 clearance in respect of houses should reduce costs and delays in relation to residential property sales. Technical amendments were introduced in relation to CGT losses arising on the disposal of certain tax incentive properties whilst letting agents and government bodies may be required to provide additional information in respect of landlords and their properties.

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The Budget announced the extension to the Home Renovation Incentive (HRI) which was first introduced in Finance Act 2013. The HRI offers a tax incentive of up to approx. €4,050 for homeowners wishing to renovate a property. This was extended in Finance Act 2014 to apply to landlords renovating residential properties, with the €4,050 limit applying to each property. This relief was due to expire at the end of 2015 but the Minister announced that this will now be extended to the end of 2016 and this has been confirmed by the Finance Bill. This is a welcome extension to an incentive which has been successful and generally regarded as beneficial to the construction sector.

CG50 Tax Clearance Certification An amendment has been made to increase the threshold for obtaining a CG50 tax clearance certificate from €500,000 to €1,000,000 for houses only. The CG50 clearance provisions provide for a deduction of 15% from the purchase price of certain property related assets, to be paid over to the Revenue Commissioners, in circumstances where a tax clearance is not provided by the person disposing of the assets. However, there is an exemption where the proceeds are below the threshold. The revised threshold applies to a “house” only (which is broadly defined as a dwelling house or part of a dwelling 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.

CGT Losses on “section 23” Properties A technical amendment has been made to the interaction between the restriction of capital gains tax (CGT) loss relief and “section 23” property relief to ensure that a CGT loss incurred on the disposal of a “section 23” property will not be unnecessarily restricted where the property is sold within a 10 year period and a claw back of the income tax relief is suffered. This will ensure equitable treatment for those who have sold properties within a 10 year period and have been subject to a claw back of their income tax relief.

Returns by Lessees and Agents There has been an amendment made to the provisions which allow Revenue to obtain information on let properties. The new provisions require property agents to include, in a return of information, the tax reference number of each property owner and the Local Property Tax (LPT) number. In addition there is a requirement for Government bodies paying rent or rent supplement to include, in the return of information, the LPT number in respect of each residential property. The commencement of these new provisions is now subject to Ministerial Order.

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.

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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.

Munro O’Dwyer +353 1 792 8708 [email protected]

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Employer PRSA Contributions

No indexation of limits

The Bill provides for an exemption for employees from USC on employer contributions to a PRSA, to bring the USC treatment of such contributions in line with employer contributions to occupational pension schemes. While a welcome change, many employers have already migrated their Group PRSAs into an occupational pension scheme structure since this anomaly arose as a result of provisions contained in the 2011 Finance Act.

As we anticipated last week, the Bill confirms that the pension limits have remained static - including the €115,000 earnings limit for personal contributions. Indeed in relation to the Standard Fund Threshold, it is worth noting that since its reduction to €2 million on 1 January 2014 it has yet to be increased. It will be interesting to see whether this is a policy decision or whether any earnings adjustment factor will be declared in December by the Minister.

PRSAs will become relatively more attractive as a means through which to provide pension benefits to staff - in particular as the requirement for Trusteeship is eliminated through a PRSA structure. That said, limits on Employer contributions that apply to PRSA arrangements, and the greater level of price competition in the occupational pension scheme space do remain as barriers to growth.

Our advice to any individual with material pension entitlements would be to consider whether future contributions might attract a penal rate of taxation at the point of access, and to explore the opportunities that are available to them to manage this exposure.

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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.

Mary O’Hara +353 1 792 6215 [email protected]

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. Finally, confirmation that the territorial scope of Relevant Contracts Tax includes the Irish Continental Shelf will be of significant interest to businesses in the energy 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.

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Non-Executive Directors (‘NEDs’)

Relevant Contracts Tax (RCT)

The Irish tax implications of the payment or reimbursement of travel and subsistence expenses to NEDs for attending board meetings in Ireland has given rise to differing views in recent times. The Bill proposes legislation to exempt nonresident NEDs from income tax, USC and PRSI in respect of vouched expenses incurred for attendance at such board meetings.

RCT is a withholding tax regime that applies on payments made to certain contractors for the performance of certain works defined as ‘relevant operations’. The scope is broad and includes construction, energy, telecom, meat-processing and forestry operations.

While most welcome, the new legislation does not extend to Irish tax resident NEDs. It would be helpful if the Department of Finance commented on the drivers for limiting the new legislation to non-resident NEDs and the prospects or timing for extending the new legislation beyond non-residents. The new provisions will be effective from 1 January 2016. Further engagement with the Department of Finance and Revenue will be required to fully understand the practical application of this solution.

Small Benefits Relief The Bill introduces a new legislative exemption from income tax, PRSI and USC on ‘qualifying incentives’ provided by employers to employees (including directors). ‘Qualifying incentives’ include both vouchers and benefits. A ‘benefit’ is defined as a tangible asset other than cash. Only one voucher or benefit may be given to an employee in any one year, the value of which cannot exceed €500, and a voucher must not be exchangeable in part or in full for cash. The voucher must not be part of any salary sacrifice arrangement between the employer and the employee. This relief builds on an existing Revenue concession whereby employers could provide an employee with a single tax-free non-cash benefit of up to €250 in a year. The new rules are applicable from 22 October 2015.

The Bill confirms that the territorial limit for applying RCT includes the designated areas of the Irish Continental Shelf. This is in addition to RCT applying to works carried out in the territory of Ireland and its territorial waters. The designated areas of the Continental Shelf are the extension of Ireland’s territorial waters where the natural land extends under the sea to the outer edge of the continental margin. Ireland’s current designated Continental Shelf is one of the largest seabed territories in Europe and extends in places beyond 200 nautical miles from the coastline baseline.

Tax treatment of payments to Standard Life shareholders Owing to postal delays earlier this year, Irish shareholders in Standard Life faced an income tax liability on a return of value from the company, even where they had elected to receive this as capital. The Bill effectively extends the election date up to which capital gains tax treatment applies and avoids an unexpected income tax liability for such shareholders.

Marriage equality As expected, the Bill amends the Taxes Acts to provide for the tax assessment of same-sex married couples following the signing into law of the Marriage Act 2015.

The Bill effectively reverses a Revenue e-brief from earlier this year and broadens the scope of RCT such that it applies to relevant operations undertaken in the Irish Continental Shelf by offshore industries such as oil and gas companies, those involved in the construction of offshore windfarms and those laying cables or similar type work for the telecommunications space. Consequently, it is a very significant confirmation with important implications for a range of industries performing work in the Irish Continental Shelf.

Chargeable persons Currently, where the net non-PAYE income of an individual exceeds €3,174 the individual is considered a chargeable person. This brings the individual within the self-assessment system, which imposes additional tax payment and filing obligations. The Bill increases this 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.

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Financial Services

Banking Treatment of Additional Tier 1 Instruments

John O’Leary +353 1 792 8659 [email protected]

Although the Budget speech contained few references to Financial Services specific measures, there are still a number of important provisions in the Finance Bill across the FS sector.

Finance Bill 2015 proposes to allow a deduction for certain interest/dividend payments made in respect of capital instruments issued by banks in order to satisfy their Tier 1 capital requirements. Until now, no deduction has been permitted for interest payable in relation to any Tier 1 capital so this represents a very significant and welcome move. Currently, all instruments issued by banks to meet their Tier 1 capital requirements are regarded as equity or quasi-equity in nature. Accordingly, interest associated with the issue of a Tier 1 debt instrument is not deductible for tax purposes. Under the proposed changes, an “Additional Tier 1 instrument” will be regarded as a debt instrument (rather than as equity) and a payment of dividends or interest by Banks in respect of an “Additional Tier 1 instrument” will be regarded as tax deductible interest. An “Additional Tier 1 instrument” is defined in EU Regulations as a capital instrument (i.e. security, bonds, notes, shares, loans) that satisfies a prescribed list of conditions as set out in Regulation (EU) No.575/2013 of the European Parliament. The Bill also includes a reference to withholding tax on the payment of the interest / dividend, saying that the exemption from withholding tax that applies in relation to interest paid on quoted Eurobonds will apply to the Additional Tier 1 instrument in the same way as it applies to a quoted Eurobond. Exemption from withholding tax applies to interest on a quoted Eurobond where either: • the bank uses a non-resident paying agent, or

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• if the payment is made by or through a person in the State, then either the quoted Eurobond is held in a recognised clearing system or the beneficial owner of the quoted Eurobond is not resident in the State and has provided a nonresident declaration to the bank. Encashment Tax The date for the filing of the annual encashment tax return has been extended from the current 20 days after the end of the year of assessment (i.e. 20 January) to 46 days after the end of the year (i.e. 15 February). Stamp duty – cash cards, combined cards and debit cards The Bill amends the existing Stamp duty regime on cash cards, combined cards and debit cards. The Bill replaces the definition of ‘bank’ and ‘building society’ with ‘credit institution’ and ‘financial institution’. It also inserts the definition of a ‘cash transaction’ and a ‘credit transaction’. The Bill replaces the existing annual flat rate charge of €2.50 for each cash and debit card and €5.00 for each combined card, subject to certain exemptions which are to remain unchanged, with a charge on withdrawals of cash from ATM machines in Ireland using these cards. The rate of charge is to be €0.12 for each such withdrawal; but the annual charge is to be capped at €2.50 in the case of each cash and debit card withdrawals and €5.00 in the case of each combined card. The Bill also revises the reporting requirements for credit and financial institutions, requiring them to report to Revenue the total number of cash transactions in respect of each of the three card types and the total number of each of

the three types of card to which the amended stamp duty cap has been applied to. There is then an additional reporting requirement for credit and financial institutions, requiring them to report the total number of each of the three types of card to which the monetary cap has not been applied, together with the total number of cash transactions in respect of those cards. The new basis for the charge and the revised reporting requirements for issuers of the cards are to come into effect for the chargeable period 2016 and subsequent years. Exchange of Information The Finance Bill amends the provisions in relation to the automatic reporting and exchange of financial information, by transposing DAC 2 (i.e. the revised Directive on Administrative Cooperation) into Irish law. DAC 2 relates to the OECD’s Common Reporting Standard (‘CRS’) and imposes an obligation on financial institutions to carry out due diligence to identify non-resident account holders and to report such data to the Revenue Commissioners. The EU Savings Directive legislation will be repealed as this will be replaced by DAC 2 / CRS.

Life Companies Life assurance policies exit tax, non-resident declarations Life assurance policies held by nonresidents are exempt from exit tax but there is currently a requirement that a non-resident declaration is completed at or about the time the policy is incepted. The Bill removes this requirement so that exit tax will not apply provided the non-resident declaration has been made prior to maturity, encashment or assignment of the policy. The Bill also extends the time period for refund claims where exit tax was applied to a chargeable event occurring on or before 31 December 2015. Previously it was necessary to make a claim within 4 years after the end of the chargeable period to which the claim relates. A refund claim can now be made within 4 years after the end of the chargeable period ending on 31 December 2016.

Aviation Sector Capital allowances for aviation services Finance Acts 2013 and 2014 proposed enhanced industrial buildings allowances on capital expenditure incurred on buildings employed in a maintenance, repair or overhaul of commercial aircraft trade or a commercial aircraft dismantling trade. However, the legislation never came into operation as it was subject to ministerial order which never materialised. The Bill now introduces a revised version of that legislation, amended to comply with EU State Aid rules, coming into operation with effect from 13 October 2015. The accelerated scheme of industrial buildings allowances provides for tax depreciation over a seven year period instead of the normal 25 year period but is limited to buildings costing up to €5million (where the expenditure is incurred by a company) and €1.25million (where the expenditure is incurred by an individual). The scheme, providing for accelerated allowances over seven years, will operate in respect of relevant expenditure incurred up to 13 October 2020. Where the expenditure incurred on a qualifying building is in excess of the noted limits and / or is incurred after 15 October 2020, industrial buildings allowances may still be claimed, albeit over the longer 25 year period. Note that it is not possible to apportion such expenditure as between the €5million / €1.25million amount qualifying for accelerated allowances and the excess above this. Once more than these specified amounts have been incurred, allowances will only be available on the total qualifying cost over the longer 25 year period.

Asset Management ICAVs The Finance Bill broadens the definition of a collective investment undertaking to include an Irish Collective Assetmanagement Vehicle (“ICAV”). Legislation introducing the ICAV into Ireland was enacted earlier this year, which offers fund promoters and investors a regulated corporate fund structure which can be established under bespoke Central Bank

legislation specifically designed for Irish investment funds. The effect of the changes announced in the Finance Bill is to apply the same tax treatment to ICAVs as currently enjoyed by Irish fund structures that are defined as collective investment undertakings. This includes the provision of tax exemption in respect of Irish income and chargeable gains. Of particular relevance is the fact that collective investment undertakings are specifically defined as “a resident” for the purposes of the Ireland-USA double taxation treaty and the broadening of the definition to include the ICAV clarifies this position. Furthermore, this clarification removes uncertainty as to whether ICAVs can qualify for the Ireland-USA treaty (subject to meeting the Limitation of Benefits provision requirements) and should enhance the attractiveness of the ICAV to investment managers seeking to market/ invest their funds in the US. Anti-avoidance Furthermore, the Finance Bill also broadens the scope of the anti-avoidance provisions relating to company reconstructions and amalgamations and transfers of assets within a group to include an ICAV. At present, anti-avoidance measures prevent the deferral of capital gains tax on the disposal of asset(s) by one company to another where the transfer is as a result of a reorganisation, amalgamation or as part of a group transfer where the acquiring company is an authorised investment company. The Bill ensures that this treatment is also extended to prevent a capital gains tax deferral where the acquiring company is an ICAV. Appointment of Irish AIFM Finally, the Finance Bill separately also provides confirmation that the appointment of an Irish Alternative Investment Fund Manager (“AIFM”) to a non-Irish Alternative Investment Fund does not bring the AIF within the charge to Irish tax. It is also expected that further changes will be made to Section 1035A to update the legislation and bring it in line with current regulatory requirements.

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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

Ronan MacNioclais +353 1 792 6006 [email protected]

Stephen Ruane +353 1 792 6692 [email protected]

As expected, the Finance Bill introduces legislative amendments to effect changes to the taxation provisions relating to oil and gas exploration and production in Ireland. The changes introduced are in line with the recommendations of the Wood Mackenzie Review of Ireland’s Oil and Gas Fiscal System, published in June 2014. The Wood Mackenzie recommendations aimed to achieve three main purposes: • To increase the overall tax take for the State from the oil and gas industry • To ensure an earlier tax take for the State • To address inconsistencies in the existing fiscal system. The legislative changes introduced in the Finance Bill seek to address these issues. The new terms will apply to licence authorisations granted on or after 18 June 2014, including authorisations granted under the 2015 Atlantic Margin Licencing Round, which closed on 16 September 2015. For authorisations granted prior to this date, the existing fiscal terms will continue to apply.

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The fiscal regime will have a direct impact on project economics and investment decisions. Therefore the stability and certainty of the regime are critical to ensuring that Ireland is seen as an attractive location for oil and gas investment. The need for stability and certainty has been highlighted by industry players in PwC’s Oil and Gas surveys. In this regard, the confirmation that the new fiscal terms will not have retrospective application is to be welcomed. However, the introduction of unfavourable changes to the tax regime at a time when the industry is in down-turn (oil prices are at levels consistent with the 2009 recession) and the fact that 48% of respondents to the PwC 2015 Oil and Gas Survey said that they were planning to

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 tax applicable to petroleum production will remain at 25%. 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 manner to the existing Profit Resource Rent Tax (PRRT), and PRRT will continue to apply to production from finds made under existing licence interests. PPT will be charged on net income on a field by field basis. PPT will apply at a rate on a sliding scale between 0% and 40%, determined by reference to the profitability of that field. For PPT purposes, profitability will be calculated as (cumulative gross field revenue less PPT paid)/cumulative field costs. This differs from the calculation made under the current PRRT system in that it includes revenue rather than after-tax profits and does not distinguish between capital and operating costs. Net income subject to PPT will be calculated as gross revenue from sales of petroleum extracted, including any amount derived from the assignment, disposal or sale of any assets, interest, options or rights related to the field, less exploration, development and abandonment expenditure incurred in respect of the field.

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 transporting petroleum via pipeline from the field to the place where it is first landed in the State. Gross revenue includes all sales of petroleum extracted from the field, including any amount derived from the assignment, disposal or sale of any assets, interest, options or rights attached to or related to that field. This means that the State will get a return from every successful find made under the new system and will receive a share of revenue in each year a field is in production. However, this could cause cash flow difficulties in some cases as the minimum PPT will still be payable even if the field is loss making. It will be important for companies to ensure that this is built into their financial modelling prior to taking any investment decisions in order to avoid any surprises during the course of the project. PPT will be payable by the due date of the company’s corporation tax return for the period, and the same provisions as apply to the collection and recovery of corporation tax will apply. Companies liable to PPT will also be required to submit a return to Revenue in respect of the PPT giving a breakdown of cumulative filed costs and revenues to date. The minimum 5% royalty may render certain high risk projects and marginal fields uneconomical and it had been hoped that the legislation would make some attempt to alleviate the burden for the most marginal fields. There will also be a

degree of disappointment that the Government has proceeded with the changes to the tax regime at a time when the industry is in turmoil due to low oil prices. Notably, 70% of respondents to the 2015 PwC Oil and Gas Survey believed that the new fiscal regime should be deferred or revised to make it more appropriate, with only 19% believing it should be introduced as initially intended by Wood Mackenzie. It is therefore disappointing that the fiscal regime has been introduced at this time as it sends the wrong message to industry about the Government’s seriousness in fostering a viable petroleum industry in Ireland.

Significant Changes to Relevant Contracts Tax Position Relevant Contracts Tax (RCT) is a withholding tax applying at a rate of up to 35% on payments made to certain contractors for the performance of “relevant operations”. It has particular relevance to the petroleum industry as work performed in relation to the exploration or exploitation of natural resources in the Irish seabed were generally within the scope of “relevant operations”. RCT was a key issue for the industry but, in May 2015, Revenue issued eBrief No. 54/15 which stated that RCT would not apply where the relevant operations are undertaken outside of Ireland’s twelve mile territorial waters limit. It was a positive development and welcomed by the industry.

However, the Bill would appear to represent a reversal of this eBrief as it now brings into the scope of RCT all relevant operations carried out in designated areas of the Irish Continental Shelf. A ‘designated area’ is an area designated by order under section 2 of the Continental Shelf Act, 1968. The designated areas of the Continental Shelf are the extension of Ireland’s territorial waters, where the natural land extends under the sea to the outer edge of the continental margin beyond 200 nautical miles from the coastline baseline, in places. Ireland’s current designated Continental Shelf is one of the largest seabed territories in Europe. The Finance Bill changes now bring the petroleum industry back within the scope of RCT in respect of any work undertaken in the Irish Continental Shelf. The Bill also has the implication of broadening the scope of RCT such that it can now apply to relevant operations undertaken in the Irish Continental Shelf by other industries such as those involved in the construction of offshore windfarms and those laying cables or similar type work for the telecommunications space. It is therefore a very significant change with important implications for a range of industries performing work in the Irish Continental Shelf.

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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 antiavoidance 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.

Caroline McDonnell +353 1 792 6526 [email protected]

Also, in a sector where there is already complexity with regard to what type of services qualify as VAT exempt educational services, the introduction of the provision specifying who qualifies for the exemption and enabling Revenue to make a determination that a specified educational activity is subject to VAT where its 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 Number

Revenue recognised that there may be an issue with the imposition of penalties as a result of lack of legislation relating to amended and supplementary returns. As a result, provision is made in the Finance Bill that any adjustment to a return is subject to the same provision as the original return. Power to Cancel VAT Number & Notification to Suppliers of Cancellation of Number There is currently no provision for Revenue to cancel VAT registration numbers. The Bill makes a specific provision that Revenue has the power to cancel VAT registration numbers where the person does not become or ceases to be a VATable person.

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An add-on to the introduction of the provision enabling Revenue to cancel a VAT number is the introduction of a provision which allows Revenue, where it considers it necessary, to notify a person’s supplier of the cancellation of a VAT number. The intention of this provision is that the active publicising of cases where VAT numbers have been cancelled will protect legitimate businesses from inadvertently partaking in fraudulent trade e.g. intra-community acquisitions using a cancelled VAT number. Capital Goods Scheme The Capital Goods Scheme (CGS) is 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

VAT applying on the sale. The Finance Bill extends this provision to “incomplete” properties. 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. Electricity & Gas Services – Reverse Charge Mechanism Under existing VAT legislation, Irish VAT at the appropriate rate (currently 13.5%) is required to be charged by a taxable person in respect of the provision of the following: • Gas or electricity to a taxable dealer carrying on a business in Ireland • Gas or electricity certificate to a taxable person carrying on a business in Ireland As a result of amendments introduced in the Finance Bill the reverse charge mechanism will apply to the abovementioned supplies such that the recipient of the supply will be required to selfaccount for VAT on the reverse charge 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.

Educational Services – Clarification of Definition

Online Betting – Extension of VAT exemption

The provision contained in the Finance Bill brings VAT legislation relating to educational services in line with recent case law. Currently, VAT legislation provides for a VAT exemption for the provision of education and vocational training or retraining, by educational establishments recognized by the State. It also applies to the provision by “other persons” of education and vocational training or retraining, provided it is of a similar kind to that provided by State recognised educational establishments.

Since 1 August 2015, bets placed with remote bookmakers and commission earned by betting exchanges from customers located in the State are subject to betting duty. Similarly, since 1 August 2015, such bets and commissions have been treated as exempt from VAT.

The Finance Bill provides for the continued exemption of educational services where provided by a “recognised body” as defined. Provision is also made for the continuous exemption of tuition given privately by teachers covering school or university education. An associated amendment is also included in the Bill which allows Revenue to make a determination that a specified educational activity is subject to VAT where its exemption creates a distortion of competition.

To ensure a “level playing field” in the VAT treatment of established operators with non-established operators (and their respective customers) and to remove any potential disincentive to such operators locating in Ireland, the Finance Bill provides for an extension to the VAT exemption to bets placed by customers located outside the State and commission earned by betting exchanges from customers located outside the State. This will be welcomed by many in the industry to ensure that Ireland remains competitive in this space.

Margin Scheme The Bill confirms that the cross border supply of “new” means of transport does not come within the margin scheme.

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.

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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 [email protected]

Tobacco Products - Rate Changes As announced in the Budget and effective from midnight on 13 October 2015, the excise duty on the price of a packet of 20 cigarettes increased by 50 cents (VAT inclusive). In addition, a corresponding pro-rata increase was applied to the other categories of tobacco products (i.e. cigars and other smoking tobacco) with a duty increase of 25 cents (VAT inclusive) arising on a 25g pack of roll-your-own tobacco.

Excise duty relief for microbreweries Finance Bill confirms the availability of a cash flow incentive for microbreweries. Instead of having to pay and reclaim the reduced rate of excise duty, microbreweries qualifying for the relief (i.e. microbreweries which produce not more than 30,000 hectolitres per annum) can now claim the relief upfront without the need to pay it first.

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Tax Warehouses – Authorisation and Compliance Changes Subject to the introduction of secondary legislation, an authorised excise warehousekeeper will be required to file relevant excise returns on an electronic basis. Further details on specific requirements and compliance obligations will be made available at a later stage. For the purposes of acting as a tax warehousekeeper for excisable products, the Finance Bill introduces a requirement that in order to apply for, and operate an authorisation, the applicant or holder of an authorisation must be compliant with excise law which includes internal controls relevant to systems, and relevant procedures relating to excisable products. In addition, tighter controls have been introduced relating to the requirements which must be met in applying to operate a tax warehouse. Finally, the Finance Bill strengthens the powers of the Revenue Commissioners to refuse or revoke an authorisation where certain requirements are not met.

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.

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Tax Compliance & Administrative Matters

In addition, the legislation is amended to provide that the timeframe within which marketers of these transactions have to provide Revenue with details of each person connected to the transaction is now 21 ‘working days’ from the date of the notice from Revenue, and not 21 ‘days’ as per existing legislation.

Obligation to keep certain records

Freda Jordan +353 51 39 9864 [email protected]

In keeping with previous years, this year’s Finance Bill contains a number of compliance and administrative changes impacting on taxpayers generally.

Mandatory disclosure of certain transactions Mandatory disclosure rules in respect of transactions under which a person obtains or seeks to obtain a tax advantage have been amended with regard to their disclosure obligations. Existing legislation requires certain persons to include the transaction number in their tax return to comply with these obligations. In circumstances where the transaction was not assigned a transaction number, or where the person was not provided with a transaction number, the person seeking the tax advantage is deemed to meet their disclosure obligations and avoid a penalty where that person provides Revenue with certain required information. The Bill now confirms that this information must be provided by the return filing date for the relevant year of assessment/accounting period.

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The Bill contains a new provision which appears to impose a requirement on a person who has an obligation, either on their own behalf or on behalf of another person, to maintain books or records in respect of a trade, profession or other activity, to retain the records of that activity for an open ended period after the trade or activity ceases. The explanatory memo accompanying the Bill states that the obligation to retain the records is for a 5 year period after cessation. There may therefore be an error in the drafting of the section and it remains to be seen if the wording will be amended as the Bill progresses through the next stage. The existing provisions which impose a requirement that records are to be retained for ongoing chargeable activity for a period of up to 6 years after the period in which the related tax return is filed remain in place.

Revenue powers Extended powers are granted to Revenue, with effect from 1 January 2016, to allow them seek taxpayer records and documents from banks and other third parties to include cases where the specific identity of the taxpayer(s) is unknown at the time the information request is made but who is capable of being identified by other means. The amendments also provide that the contents of any court order which may be granted in seeking any

such information from a third party shall not be disclosed to the taxpayer. However, Revenue must have reasonable grounds for suspecting that the disclosure of the order would lead to serious prejudice of the proper assessment or collection of the tax. Revenue’s powers to obtain information from various sources where foreign tax is at issue is also amended to allow for an application to be made to the Appeal Commissioners for their consent to seek taxpayer information relevant to foreign tax matters from a third party (where that third party name was provided by a financial institution). This eventuality may arise, for example, where such information is sought from Revenue by a foreign tax authority under existing legal arrangements, such as a double taxation agreement.

Discharge of Revenue Commissioners’ and CollectorGeneral’s functions A minor amendment is contained in the Bill to provide that, with some exceptions relating to court proceedings initiated by the Collector General, Revenue may nominate any of their officers to discharge the duties of either the Revenue Commissioners or the Collector General in relation to the collection of tax, recovery in cases of civil proceedings and the power to request a taxpayer’s statement of affairs.

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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