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Ireland Budget Highlights 2012

Summary

Ireland - Budget 2012

Minister Michael Noonan, the Minister for Finance, presented his first budget to the Dail on 6th December, 2011 which dealt solely with taxation measures. Many of the changes had been well publicised prior to the Minister’s speech. The overall objectives set out were the protection of employment, promotion of International Trade, the support of indigenous industry, farming and tourism and finally efforts to promote the restoration of a functioning property market. It remains to be seen whether these objectives will be achieved.

We have outlined below, some of the measures introduced by Minister Noonan which I believe will be of specific interest to the international business community.

Income tax rates and tax bands

As it is the Government’s view that increases in income tax will impact on job creation they have not made any changes to income tax rates and tax bands.

Capital Gains Tax and Capital acquisitions tax rates:

The rates of CGT and CAT have been increased from 25% to 30% from 6th December, 2011.

Tax on savings:

From 1st January, 2012 the deposit interest retention tax rate and the rate of exit tax that apply to life assurance policies and investment funds will be increased by 3 percentage points in each case and will now be 30% for payments made annually or more frequently and 33% for payments made less frequently than annually. The usual exemptions are available to non-residents.

Corporation Tax:

Ireland is to retain it’s 12.5% Corporate Tax Rate. In his speech the Minister said:

“Today, I want to say to our friends in the multinational sector who continue to invest so strongly in Ireland and Europe, there will be no change in Ireland’s 12.5% Corporate Tax Rate. We promised this in the Programme for Government and we will fulfil this commitment”.

The three year start up exemption from corporation tax and capital gains, for trading companies, will be extended to new trades which commence in the years 2012 to 2014 inclusive. The relief applies where the annual corporation tax liability of the start-up company does not exceed €40,000 with marginal relief applying where the corporation tax liability is between €40,000 and €60,000. Entitlement to the relief is also linked to the amount of employer’s PRSI paid by the company.

Stamp Duty on Commercial Property

A single rate of 2% stamp duty will apply for transfers of non-residential properties for instruments executed after 6/12/2011. There is a reduced rate of stamp duty (50% of applicable rate) for transfers between related parties. This has been retained in respect of non-residential properties up to 31/12/2014. This means that transfers of non-residential properties between related parties will attract a rate of 1% stamp duty.

Increase in standard VAT rate:

As expected, the standard VAT rate is to be increased from 21% to 23% with effect from 1st January, 2012. This follows a trend of recent increases in the standard VAT rate in other EU States. Twenty out of the twenty seven EU Member States have increased VAT in the last four years and further increases are being considered by several Member States. The Minister has stated that he will not increase the VAT rate beyond 23% during the lifetime of the current Government. Businesses operating in sectors that are VAT exempt should encourage suppliers to invoice before the VAT change in order to avoid an additional VAT cost.

Financial Services:

In recognition of the major contribution which the International Financial Services sector continues to make to the economy, the Minister has promised to introduce a package of measures in the Finance Bill 2012 to support the continued success of the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry.

Special assignee relief programme.:

In a very welcome move, The Government, in order to facilitate the development and expansion of business here, is to enhance the Special Assignee Relief Programme (SARP) to enable multinational and indigenous companies to attract key talent to Ireland from abroad. Details of this relief have yet to be released.

Foreign Earnings Deduction

A new foreign earnings deduction is to be introduced to aid companies to expand into emerging markets. Many multinational and indigenous Irish companies require employees to be present in foreign markets on a regular basis to develop business relationships and sales. The deduction will provide an incentive to such employees and will apply to individuals who spend 60 days a year or more developing markets for Ireland in Brazil, Russia, India, China and South Africa. Full details will be published in the Finance Bill.

Research and Development Tax Credit:

The Minister has introduced amendments to the research and development tax regime. This relief applies in respect of qualifying activities in the field of science and technology. The measures should assist in increasing employment and in attracting and retaining key employees. The measures are as follows:

• The existing R & D tax credit regime operates on an incremental basis. The volume basis will apply to the first €100,000 of qualifying R&D. The existing incremental basis will continue to apply to the balance of the R&D expenditure.

• Currently outsourced R&D costs are eligible for relief where they do not exceed 10% of total costs or 5% where work is outsourced to third level institutions. These limits will be increased to allow the greater of the existing percentage arrangement or €100,000.

• The Minister also announced that companies in receipt of the R & D tax credit will have the option to use a portion of the credit to reward, on a tax free basis, key employees who have been involved in the R & D process. It is envisaged that there will be no additional cost to the exchequer as the bonus comes from the R&D credit actually received by the company.

Investing in renewable energy generation:

A tax deduction of up to €12.7m pa is available to a company investing in shares of qualifying renewable energy companies. This is subject to a cap for each investment of the lesser of 50% of the capital expenditure incurred by the qualifying company or €9.525m. This relief has been extended to 31st December, 2014.

Employment and Investment Incentive (EII) Scheme and Seed Capital Scheme (SCS):

This EII scheme, which was introduced as a replacement for the old Business Expansion Scheme, required EU approval which was granted, giving effect to the new scheme on 25th November, 2011. On foot of consultations with the EU, the requirement that relevant trading activities be principally carried on in Ireland and that at least 75% of the amount expended on those activities be expended in Ireland has been replaced by the requirement that the relevant trading activities be carried on from a fixed place of business in Ireland. This should allow a greater range of activities to qualify for the EII scheme.

The SCS scheme has been enhanced and removes the limitation on the trades that qualify. These provisions also take effect from 25th November, 2011.

Residency Rules:

While there were no changes to the residency rules in the Budget, a set of proposed amendments to these rules will be published in 2012.

Domicile Levy:

The domicile levy was first introduced for 2010 and applied to an individual who was domiciled in and a citizen of the Irish Republic in a tax year where certain conditions were fulfilled. To prevent avoidance of the levy, the “citizenship” condition has been removed. This will broaden the base for the levy and make it more difficult to avoid.

Other measures introduced in the Budget by Minister Noonan:

• No increase in employee PRSI or USC.

• PRSI for employees to be extended to investment income.

• USC threshold to be increased from €4,004 to €10,036.

• Removal of employer PRSI relief on employee pension contributions.

• Changes to CGT retirement relief.

• Reduction in Class A CAT band which refers mainly to gifts and inheritances taken by children from parents.

• Improvements to stock relief for farmers.

• Vat refund available to unregistered farmers for wind turbines purchased after 1st January, 2012.

• Introduction of €100 p.a. household charge.

• Changes to Approved Retirement Funds and vested Personal Retirement Savings Accounts (PRSA’S).

• Changes to property based tax incentives.

• Mortgage relief to be increased for first time buyers who bought during the height of the property boom between 2004 and 2008.

• First time buyers and non first time buyers who purchase a home in 2012 will be entitled to mortgage interest relief at 25% and 15% respectively.

• Mortgage interest relief to be phased out by 2018.

• The first 36 days tax exemption for illness benefit will be removed.

• Increase in motor tax from 1st January, 2012 on all vehicle types. Also consulation process to be carried out in connection with the motor industry to increase VRT and motor tax revenues in future years.

• Carbon tax to increase by €5 per tonne. However this increase will not apply to solid fuels such as briquettes and coal.

• Betting duty to apply to remote betting.

Conclusion

Whilst most focus is on the Minister’s Budget speech the actual changes to the tax regime come through legislation. Between now and early February 2012, when the Finance Bill will be published, representations will be made to the Minister for Finance. The Bill will be debated in the Oireachtas and the Finance Act will be published at the end of March 2012. It is only then that the tax law is firmly established. Many changes can take place between Budget Day and the passing of the Finance Act. We have prepared these comments as a general overview of the main changes announced in Budget 2011 but individuals who are affected by the changes should await the detail in the legislation and take independent taxation advice tailored to their unique personal circumstances before making any decisions based on the Budget announcements.

Finally, we would like to note there was one thing Minister Noonan failed to say at the end of his Budget speech…Happy Christmas!

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