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Lenihan fights for foreign investment
07 February 2010 By Ian Kehoe, Chief news correspondent
It was undoubtedly a week of two halves for Brian Lenihan and his officials in the Department of Finance.
Now the finance minister and his team are hoping that the events of the second half of last week will help overcome the effects of the first.
Last Tuesday, the department published the exchequer figures for January, as well as their expected tax targets for all of 2010. Despite the department’s best efforts to put a brave face on it, the numbers were decidedly grim.
The state took in €3 billion in taxes in the first month of the year, down almost 20 per cent on the same period last year - and a decrease of 35 per cent on 2008 levels. All forms of taxation, from stamp duty to income tax, experienced a sharp decline.
The figures also highlighted just how far the property market had fallen in the space of a year. Fees paid to the Property Registration Authority, an accurate gauge of property activity, fell from €4 million in January 2009 to just €2.1 million this year.
The department also revealed that it expected to take in €31 billion in tax this year, down from the €32.5 billion it harvested last year. Department officials said that much of this decrease was a knock on effect of the decision to take €4 billion out of the economy in the budget.
The department was quick to point out that the figures were broadly consistent with returns in the latter months of 2009, and should not be compared with the same time last year. However, the data clearly showed that no sign of an upturn in any area of tax was expected in the short term.
The fightback came last Thursday. At 3pm, Lenihan and his government published the Finance Bill, which gave legal effect to the budget.
The bill also contained many new taxation measures aimed at promoting industry and boosting the tax take.
The Revenue Commissioners were given broad new powers to target tax evaders, while a number of tax shelters, avoidance schemes and reliefs were ended or curbed. With the tax take in freefall, the government clearly indicated that no one - from tax exiles to tax dodgers - would survive without paying their fair share.
Significantly, the bill contained a large number of measures aimed at promoting Ireland as a place of investment.
The bill had a number of small incentives for Irish enterprises, but the tone of the document was clearly aimed at luring foreign companies and investors back to Ireland.
‘‘The Finance Bill was effectively about securing foreign direct investment (FDI)," said Brian Keegan, director of taxation with Chartered Accountants Ireland. ‘‘Ireland Inc is in a better place now than it was before the bill."
This view was shared by others in the industry. ‘‘On the face of it, it might seem like there is nothing spectacular. But when you put it all together, it is a massive boost for Ireland for inward investment," said Mark Redmond, chief executive of the Irish Taxation Institute.
Bernard Doherty, tax partner with Grant Thornton, said:
‘‘To sum it up, this is a pitch for FDI. It is a pro-business, entrepreneurial document."
Attracting FDI to Ireland
On the face of it, introducing new regulations to close a loophole used by multinationals to lower their tax bill might seem an odd way to attract foreign companies to Ireland. However, the decision to address so-called ‘transfer pricing’ by US firms operating in Ireland has the potential to boost the economy.
The new legislation is designed to respond to pressure at European level, and ease overseas concerns that Ireland was a so-called ‘soft touch’ for aggressive tax planning. By changing the legislation, Ireland is now within OECD norms, and tax experts said this would make the country more attractive.
‘‘Transfer pricing rules are a feature of the tax system in all modern, developed economies.
It is essential that Ireland stays up to date to remain competitive in the investment marketplace," said Keegan.
Transfer pricing relates to transactions between companies within the same group, where it is not clear whether the price being paid for goods or services accurately reflects their value. Artificially boosting or reducing the price paid has the effect of reducing reported profits in one jurisdiction and increasing them in another.
The legislation seems to have been designed by the Department of Finance to comply with international norms, while not placing undue pressure on small or medium-sized businesses.
‘‘I sent out the regulations to our counterparts in Britain and the US last night, and the feedback is that they are not going to scare anyone off," said Martin Phelan, tax partner with William Fry solicitors.
‘‘Overall, this legislation is good for Ireland. It is about being seen to respond to criticism, and that is what we have done."
It is not the only pro-FDI initiative in the bill. Changes to the corporation tax regime will make it easier for multinationals to locate their headquarters , research departments and patents here.
Specifically, changes to the tax treatment of patent royalties will be a major boost, according to tax experts.
Essentially, the legislation encourages multinationals to leave their patents and copyrights in Ireland by easing the administrative burden and providing tax credits.
The bill also contains unilateral credit relief for royalties, meaning Ireland will not tax royalties if they have been taxed in another jurisdiction. ‘‘This is a really smart move by Finance," said Keegan. ‘‘It will help position Ireland at the forefront of research and intellectual property."
Furthermore, the existing R&D tax credits have been amended to cover situations where a company carries out research and development in separate geographic locations.
‘‘It was a small change, but I imagine there is more to come in R&D down the line," said Redmond.
In a move that has been warmly welcomed by multinationals and the Irish business community, the government also moved to extend the ‘remittance’ tax regime for foreign executives working in Ireland. The scheme was reintroduced last year for US executives, having previously been scrapped, and it has now been extended to cover European executives.
The stipulation that the foreign executive remain in Ireland for three years to avail of the tax break has also been reduced to one year. Brendan Kelly, director of Ibec lobby group Financial Services Ireland (FSI), said that it was clear that the blanket abolition of the remittance basis was counterproductive.
‘‘Highly paid staff were driven away - and the economy suffered as a result," said Kelly.
‘‘Attracting senior staff to Ireland is essential to get firms to set up here and create jobs."
One of the most significant moves in the Finance Bill could well be the decision to change the tax rules to attract investment from the Islamic world.
The Finance Bill introduces new measures designed to accommodate transactions that comply with Sharia law, which do not allow for making or receiving interest payments in loans.
The complex nature of Islamic financing meant that taxing such products was cumbersome and difficult. The government has now streamlined the system to attract more Islamic finance.
‘‘There is one trillion dollars in Islamic finance at the moment.
Ireland is now making a serious pitch for this business.
If it works, it could be one of the most significant decisions of the past 20 years. This is a serious business, and Ireland wants to be a player," said Keegan.
The move was one of a range of initiatives aimed at the financial services sector, particularly the IFSC. The bill ensured that funds could be transferred into Ireland more easily, while a number of specific rules were altered to boost finance investment.
‘‘The package of changes represents one of the most significant boosts for the IFSC in the last decade," said Kelly.
Revenue powers and reliefs
In his budget, the Minister for Finance imposed restrictions on the use of tax relief and income shelters, while a domicile levy targeting so-called ‘tax exiles’ was also unveiled. Last week, Lenihan went further by closing down a number of tax reliefs and curbing several tax avoidance schemes.
Individually, the moves were not overly significant. Combined, however, they represented the latest effort to close loopholes and force people - and companies - to pay tax. The bill closed off six reliefs, including a relief available to ‘ passive investor s’ who ploughed money into historic buildings and gardens. The tax relief available when a gift was donated to the state was also curtailed, and the benefit-in kind exemptions of an employer providing art to employees was curbed.
Capital allowances for building childcare facilities were axed, while tax relief on service charges, such as bin charges, was ended. In total, the Department of Finance estimated that the net benefit to the exchequer from these would be in the tens of millions of euro, rather than hundreds of millions.
A decision to close off a loophole in relation to capital gains tax( CGT) will have a more profound impact on the state coffers. The bill introduced legislation to counter a specific avoidance scheme, whereby companies deliberately created a paper loss on their Irish accounts in order to avoid paying CGT.
The Revenue Commissioners identified 26 such cases, which cost the exchequer €400 million. Britain scrapped the loophole a number of years ago, and Ireland has now followed suit.
Similarly, the bill also targeted a scheme whereby the value of a company was artificially reduced so that stamp duty was paid only on a nominal amount if the company was sold. The provision was targeted at cases where the motivation of the deal was tax avoidance.
Interestingly, the government also moved to amend the rent-a-room scheme, to stop company directors availing of the relief. The relief was aimed at aiding student accommodation, but officials noticed that a number of executives were claiming the relief, arguing that a spare room was occasionally used by clients of their company. This will no longer be allowed.
In an effort to track tax dodgers, the Revenue was also given increased powers, while fines for tax evasion were increased sharply. The Revenue will now be given information by the Property Registration Authority to monitor stamp duty payments, and will also have access to information held by the Commission for Taxi Regulation.
This power was introduced at the behest of the taxi unions, which are trying to weed out individuals in the profession who they believe are paying no tax.
The Revenue will also have access to information that the National Asset Management Agency (Nama) has in relation to offshore entities or vehicles. This could potentially provide significant problems for a number of large developers who operate through offshore vehicles.
Furthermore, the Revenue will have access to freight and passenger manifests of ships to prevent smuggling. The Revenue already gets this information in practice, but the law has been changed to make it official.
In a move which has been described by tax experts as highly significant, the Revenue will now have the right to apply to the Appeals Commissioners to obtain information from third parties, on the same basis that they can get information from banks. Sources said this would increase significantly the scope of the Revenue to access previously confidential personal information.
‘‘The Revenue has been granted significant additional powers of investigation, collection and enforcement across all tax heads. It must be remembered that Ireland already has very high levels of tax compliance by international standards.
Tax evasion is not in anyone’s interest," said Keegan.
‘‘But businesses exist for purposes other than to act as taxpayers and tax collectors, and the new powers being granted to Revenue must be used sensibly and sparingly.
Otherwise, the cost of tax compliance for compliant businesses will be too high."
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