Ireland's International Tax Strategy and Budget 2018
Following the announcement of the Irish Budget 2018 this week, the Maples and Calder Tax Group has prepared a commentary on Ireland's International Tax Strategy and Budget 2018.
1. International Tax Strategy – BEPS and Tax Reform
The Minister for Finance published an update this week on Ireland's International Tax Strategy. This restates Ireland's intentions published previously in relation to international tax reform. It also contains a consultation document on future changes to the Irish tax regime. This consultation is likely to inform the implementation of major EU and OECD initiatives by Ireland over the next decade including on issues such as interest restrictions, hybrid rules, tax avoidance and transfer pricing.
In relation to EU tax reform, including reform of digital taxation, the Minister notes that decisions on tax policy require the agreement of all EU Member States. The statement notes Ireland's desire for global consensus on how digital companies are taxed, perhaps in opposition to some standalone EU initiatives in this area.
The public consultation process on the implementation of the EU Anti-Tax Avoidance Directives (known as ATAD I and II) and the G20/OECD BEPS initiative is formally announced. The consultation will also deal with Irish transfer pricing law and the simplification of Ireland's dividend tax system.
Maples and Calder will be actively participating in the consultation process with the Irish authorities, including through Irish industry groups and welcome any input or suggestions from clients. The outcome of the consultation has the capacity to significantly reshape the Irish corporate tax sector and will be closely watched by investors and international business.
With regard to international investors, the statements and questions regarding the proposed interest limitation and hybrid rules will be of significant interest. Ireland's stated position is that interest limitation in ATAD I will not apply until 1 January 2024. The consultation requests feedback on the implementation of the anti-hybrid rules, a series of complex anti-avoidance rules intended to be implemented in 2020 and 2022. Given Ireland's status as an investment jurisdiction, the desire to carefully and thoughtfully implement these rules is welcome. Certain EU jurisdictions have already implemented these rules and it is hoped that Ireland will benefit from the experiences of others.
Irish transfer pricing provisions are also under consultation. Currently these do not apply to Small and Medium Sized Enterprises and the consultation seeks views on whether it should be extended. In light of some of the complexity of transfer pricing and the fact that these groups typically do not operate cross border, it is suggested that this would be an unwelcome move.
The application of transfer pricing to non-trading entities is also under consultation. The Coffey Report recommended that such an extension take place and the consultation is expected to examine capital transactions, as well as non-trading entities, such as property companies.
Finally, the consultation requests views on the simplification of Ireland's dividend taxation provisions. Currently Ireland operates a credit system for overseas dividends. The operation of these provisions is complex and there is a strong argument for a simplified, clear regime to be introduced and to match international norms.
2. Budget 2018 – Property Focus
The stamp duty rate on Irish commercial property acquisitions increased from 2% to 6%. This represents a trebling of the existing 2% rate. The 6% rate is applicable to sales or long leases of commercial property after 10 October 2017.
At time of writing it is unclear whether, in line with historic practice, transfers pursuant to binding contracts entered into on or before 10 October 2017 will continue to benefit from the 2% rate. Announcements by the Minister indicate that more clarity will be available on these transitional measures on publication of the Finance Bill. For those clients currently under contract, or in negotiations to acquire property, the clarification of this point will be material. In addition, we are aware that lobbying efforts are being made by the farming industry to mitigate the effects of the rate rise for agricultural land.
Residential property will generally continue to be subject to 1% stamp duty rates on consideration under €1 million. A 2% rate will apply to residential property consideration over €1 million. For multi-unit acquisitions, such as a block of apartments, the position is therefore unchanged as a result of the Budget.
Perhaps cognisant of impacting the residential construction market, the sale of development land which is ultimately intended to be used for residential property will be subject to a stamp duty refund scheme. The refund will be subject to certain conditions, including a requirement that developers will commence the relevant development within 30 months of the land purchase. The detailed operation of this scheme will be closely reviewed in the Finance Bill.
Transfers of shares in an Irish company holding commercial property currently continue to be subject to stamp duty at 1%. If this position remains unchanged, the differential between stamp duty on direct and indirect property transfers, may result in a commercial preference to acquire the shares in the property holding entity. A purchase of such an entity is a very different transaction to the purchase of the land directly and will involve analysis of additional factors such as the tax and liability profile generally of the property company. The availability of stamp duty reliefs, such as exemptions for reconstructions and reorganisations, is also likely to be reviewed by purchasers or sellers.
Vacant Site Levy
The existing vacant site levy will increase from 3% to 7% if the vacancy persists. In practical terms any owner of a site on the vacant site who does not develop their land in 2018 will pay the 3% levy in 2019 and then become liable to the increased rate of 7% from 1 January 2019. Ultimately, this will amount to a 10% levy being payable over 2019 and 2020. Landowners will be keen to undertake steps to mitigate this levy through removing their properties from the vacant site register.
Capital Gains Tax
In 2011, the Government introduced a "CGT holiday" for land and buildings in an effort to incentivise the property sector at that time. This provided a capital gains tax ("CGT") exemption to disposals of land acquired between 7 December 2011 and 31 December 2014 (inclusive), provided the land was held for seven years. Maples have noted previously that this measure could be a barrier to property transactions, as investors are required to hold the land for a prolonged period of time. The Minister has announced that the seven year period will be shortened to four years in order to enjoy a full CGT exemption. The amendment will provide that gains in respect of land or buildings that were acquired between 7 December 2011 and 31 December 2014 will be exempt from CGT if they are sold after four years and within seven years from the date they were acquired.
It is worth noting that the original CGT measure applied on an acquisition of property within any EEA State by an Irish resident. Hence the revised relief will be attractive from an Irish standpoint to those who acquired European property between 7 December 2011 and 31 December 2014.
In a strange twist, investors who purchased prior to 2015 directly or by using taxable vehicles, may find that they have a better post-tax return than those who acquired using more complex regulated property fund structures which are now subject to the 20% IREF tax regime introduced in 2016.
Rented Residential Accommodation
Currently there is a restriction on the deductibility of interest on rented residential accommodation. Mortgage interest deductibility is currently restricted to 80% but is increasing incrementally by five percentage points per year, with full restoration due from 2021. This was not referenced in the Minister's Budget speech, however it is understood that it will be enacted as expected in the Finance Act.
A new deduction is being introduced for pre-letting expenses of a revenue nature incurred on a residential property that has been vacant for 12 months or more. The expenditure must be incurred within the 12 month period before the relevant property is let as rented residential premises. A cap on allowable expenses of €5,000 per property will apply and the relief will be subject to clawback if the property is withdrawn from the rental market within four years. The relief will be available for qualifying expenses incurred up to the end of 2021. There is no amendment to the restriction on pre-letting expenditure for commercial property.
Funding Housing Development
In an effort to provide loan finance to the residential construction sector, the Minister announced that up to €750 million of the Ireland Strategic Investment Fund ("ISIF") will be made available for commercial investment in housing finance. The funds will be made available to a new vehicle to be known as Home Building Finance Ireland ("HBFI"). ISIF is already an investor in a number of loan origination platforms managed by third party investment firms, however this initiative appears to involve a slightly different model and its development will attract significant interest from potential borrowers, as well as from competitors in the finance space.
This initiative will require legislation to give effect to the proposals and therefore represents a medium term measure. Perhaps conscious of EU State Aid issues which have arisen in relation to previous proposals to use NAMA (the Irish "Bad Bank") to engage in residential construction, the Minister noted that the proposal will have to avoid distortion of the market and comply with EU State Aid rules.
Tax and Fiscal Treatment of Rental Accommodation Providers Report
The Department of Finance also published a report on the tax treatment of landlords. This represents the distillation of a consultation carried out in 2017 to which Maples and Calder contributed. It provides a number of policy options to resolve the current housing shortage. These include measures to enhance the deductibility of a landlord's capital outlay and other expenses such as local property tax. While a number of these may be implemented in the short term, the report outlines some important unresolved questions about Irish housing policy, such as whether supports should be targeted at specific sectors or classes of landlord. It suggests that such policy questions be considered by Government before undertaking significant future interventions in the rented residential property market. In many respects this reflects the approach suggested by Maples and Calder in an article in 2016 where we called for a broader review of tax policy designed to ensure the population is provided with the accommodation which it required.
3. Share Options and Entrepreneurs
The Minister did not announce any changes to the CGT rate for entrepreneurs. This has long been called for and the absence is a disappointment to those within the Irish business start-up and venture capital community.
In a more positive note for innovation, Budget 2018 sees the introduction of a new employee share incentive scheme called the Key Employee Engagement Programme ("KEEP") designed to help small and medium enterprises attract and retain key personnel.
The KEEP scheme will offer CGT treatment on share options granted to employees working for unquoted SMEs. It appears that the CGT liability will arise, not when the options are exercised, but when the shares are actually sold. This is in contrast to the current position which would give rise to a liability to income tax, PRSI and USC (universal social charge) on exercise of the share options by the employee. It also aligns the taxable event with the receipt of funds.
The interaction of the KEEP scheme with existing reliefs, such as entrepreneur's relief (which reduces the CGT rate to 10% on €1 million of gains) will be closely watched.
The scheme will apply to qualifying share options granted between 1 January 2018 and 31 December 2023 and certain qualifying conditions will need to be met during the holding period of the options. Details of the scheme will be in the Finance Bill.
The commencement of the KEEP scheme remains subject to EU State Aid approval by the European Commission, which should hopefully be granted in early 2018.
4. Income and Employment Tax
Budget 2018 introduced a number of minor changes to USC, PRSI and income tax. Broadly, these changes will result in a modest increase in the take home pay for middle income earners. These changes are expected to take effect from 1 January 2018 onwards.
Employers will be concerned about the increase in employers' PRSI. Currently this is 10.75%, but will increase to 10.85% in 2018 and by a similar margin in each of the following years so that, by 2020, the rate will be 11.05%. Employers' PRSI is applicable to remuneration in monetary form and also to certain forms of share awards.
No changes were announced to the SARP (Special Assignee Relief Programme) scheme. SARP is aimed at encouraging employers to relocate key foreign staff to Ireland. Provided the conditions are met, SARP allows such employees to avail of Irish income tax relief on their remuneration.
Budget 2018 introduced a number of measures to encourage the purchase of electric vehicles. A 0% BIK rate will apply where employers purchase electric vehicles for their employees during 2018. This is a significant incentive; where an employer purchases an ordinary vehicle for their employee the rate of BIK is 30% of the original market value of the car. Further, where employees charge their electric vehicle at their place of work there will be no BIK charge for the employee if the employer covers the cost of the electricity. This is currently a temporary measure during 2018. If it is too successful, it could well be withdrawn in 2019.
5. Sugar Tax
Budget 2018 introduces a tax on non-alcoholic sugar-sweetened drinks ("sugar tax") with effect from 1 April 2018. This is subject to EU State Aid approval therefore will require EU confirmation prior to enactment. The exclusion for alcoholic beverages is noteworthy.
The aim of the sugar tax is; to tackle obesity and other health risks in Ireland and it aligns the Irish regime with the proposed UK sugar tax regime.
The sugar tax will be liable on the first supply in Ireland, such that it will be payable on the importation and production of sugar based drinks. It will apply to water based and juice based drinks with a sugar content of greater than five grams per 100ml. It will not apply to bottled water, pure fruit juices, dairy products or diet drinks (carbonated drinks with a sugar content of less than five grams per 100ml).
There are two rates of sugar tax; 20 cent per litre on drinks with five to eight grams of sugar per 100 ml, or 30 cent per litre on drinks with more than eight grams of sugar per 100 ml. A typical can of soft drink can have 11 grams of sugar per 100 ml. The new tax will add approximately 10 cent to a 330 ml can of soft drink.
It is expected that the sugar tax is expected to raise €30 million in 2018 and €40 million for a full tax year thereafter.
If you require any further advice or assistance, please liaise with your usual Maples and Calder contact.