Finance Dublin
24 January 2012
Introduction
One of the few positive aspects of the Minister for Finance’s 2012 Budget, delivered in December, was his commitment to introduce specific measures in the Finance Bill to support the continued success of the financial services sector.
While there are several initiatives that we believe the Minister should consider, we have selected 5 potential measures below that have the potential to further boost our status as a leading player in the global financial services sector.
The Green IFSC
There have been significant steps taken in recent years to establish a “Green IFSC” in Ireland. The objective is to establish Ireland as a world-class centre for green finance and enterprise, with the ability to both create and sustain employment.
Last year’s Finance Act saw the addition of carbon credits to the list of qualifying financial assets under Ireland’s securitisation company regime. This was a very positive development.
What we would like to see in Finance Bill 2012 are some further positive steps, for example the tailoring of the recently introduced Employment and Investment Incentive to accommodate green projects based in Ireland. By amending the existing rules to allow for investment at the “pre trading” stage, green projects would come within the ambit of this relief, thereby significantly boosting indigenous green initiatives.
CGT on Foreign Denominated Bank Accounts
The functional currency for most Irish sub holding companies is the functional currency of the ultimate parent, which in many cases may not be euro.
In many cases, the financial statements of the company may report no foreign exchange movements, but the tax position can be dramatically different. While not recognised in the financial statements, foreign exchange fluctuations against the euro can result in unexpected Irish CGT liabilities in the context of capital contributions, dividends received and payable.
What would be very welcome is the introduction of legislation that removes an Irish tax charge where there are movements in foreign currency accounts, where those accounts are denominated in the functional currency of the company.
Technical Exposure to Irish Income Tax
Under Irish tax legislation, Irish tax is chargeable on Irish property regardless of whether the owner is resident in Ireland.
Thus, non Irish residents in receipt of Irish interest income may be liable to Irish tax. Generally, this tax is collected via a withholding tax mechanism. In most cases, payments to tax treaty residents are exempt from both withholding tax and any residual exposure to Irish tax.
However, the position in respect of non tax treaty resident recipients of Irish interest is not as clear-cut. In certain cases, for example where interest is received in respect of quoted Eurobonds, there is a specific exemption from Irish withholding tax. However, there is no related specific exemption from Irish income tax. Thus, a technical exposure to Irish tax remains for the non tax treaty resident investor.
While Revenue may not pursue such liabilities, the issue can cause reporting issues for the non resident investor, for example in connection with US Fin 48 uncertain tax position reporting. Thus we would recommend the introduction of a broader exclusion from any residual exposure to Irish tax in the context of bona fide investments. Such a change would significantly increase the marketability of Irish debt.
Foreign Dividend Exemption
Ireland currently operates a credit system whereby dividends receivable by Irish companies are taxable in Ireland but a credit is available for foreign taxes paid. Generally, there is no residual Irish tax payable on the receipt of foreign dividends where the foreign tax rates are higher, however the accompanying calculations can be complex.
The introduction of a blanket foreign dividend exemption would be advantageous and would result in an administratively simpler and more transparent regime.
Property Incentives and Sales by Receivers – Impact on Banks
The final measure highlighted is one that impacts on Irish banks in the context of receiverships.
The appointment of a receiver and the subsequent sale of a property can result in a claw back of allowances claimed on a property where the sale takes place within the tax life of the property. Such charges are treated as additional rental income and the bank (where they have appointed a receiver) will be liable to the taxes. However, the tax is computed in accordance with the individual’s circumstances.
The current position poses some practical difficulties for the banking sector and clarification of the position in the Finance Bill would be very helpful, including any amendments to existing legislation where necessary.
Peter Vale is a Partner and Sarah Meredith is a Manager in Grant Thornton's Tax department.