The Irish Economy has been in the spotlight in recent months and there have been a number of tax developments that may be of interest to the international observer. November 2010 saw the publication of a four year “National Recovery Plan” and in December Ireland experienced the toughest budget in the history of the State.  In February, the Finance Act 2011 was passed and a general election was held which has brought about a change in Government. The new Government is a coalition of Fine Gael and Labour, with the centre right Fine Gael being the largest party. A new Programme for Government was agreed on 6 March which provides some detail on the direction of the new Government on tax matters. 

Some of the recent developments of relevance from an international perspective are set out below.

Business Taxes:

• No change to Ireland’s 12.5% Corporation Tax Rate for trading companies. The 12.5% rate of corporate tax is a fundamental part of the Irish international brand. Fine Gael and Labour, the incoming government parties, have emphasised their commitment to the 12.5% rate.
• The Corporation Tax exemption for start up companies has been extended to cover new trades commencing in 2011.  Relief is now linked to the amount of employers’ social security (“PRSI”) paid by the company.
• Anti-avoidance measures have been introduced to restrict the corporation tax deductibility of interest in two circumstances, namely (i) where intra-group loans used to purchase assets from another group company, and (ii) where interest as a charge relief is claimed on loans used to fund the financing activities of foreign connected companies where the foreign return earned is not repatriated to Ireland. Loans made before 21 January 2011 will not be affected by the new restrictions on interest deductibility.
• The tax exemption for dividends and income earned from patent royalties is abolished with effect from 24 November 2010.
• The current Business Expansion Scheme will be reformed and will become an Employment and Investment Incentive Scheme.  The new scheme will increase the amount that companies can raise from €2 million to €10 million (with a cap in any 12 month period of €2.5 million). The scheme operates by providing income tax relief to those who invest in Irish trading companies. The scheme is subject to approval by the European Commission.
• Relevant Contracts Tax (“RCT”) is a withholding tax regime in the construction, meat processing and timber processing industries. The system is to be modified to provide three withholding tax rates linked to the contractor’s compliance record. The rates are to be 0%, 20% or 35%. Monthly repayments of RCT are abolished and replaced with a tax off-set system. Increased reporting requirements are also being introduced for RCT principals to improve compliance and reduce fraud.  The effective date for the new rules has not been decided and until then, the existing scheme applies.
• There is some positive news for the financial services sector. A special tax regime exists for “qualifying companies” engaged in certain financial transactions, including securitisations. Companies under this regime could previously only invest in financial assets but can now invest in a large range of commodities, plant and machinery (including aircraft, ships and motor vehicles) and carbon credits.
• A mandatory reporting regime is in place effective from 17 January 2011. Essentially, it requires tax advisors, banks and in some cases the user, to report certain transactions to the Revenue Commissioners.  The introduction of the regime followed a period of consultation.

Personal Taxes:

• 1 January 2011 saw the abolition of the Income Levy and Health Levy and the introduction of a single Universal Social Charge (“USC”). The USC rates are 2% on the first €10,036, 4% on the next €5,980 and 7% on the balance up to €100,000. Self employed earnings above €100,000 are to be subject to a 10% rate, while employees are subject to a maximum of 7%. Reduced rates apply to those over 70 years.
• The new Programme for Government refers to an intention to review the USC. It also states that there is to be no increases to the income tax rates and bands.
• Share based remuneration is now subject to the USC for the employee and to social security (PRSI) for both employer (10.75%) and employee (up to 4%). This applies to both Revenue approved and unapproved schemes. Employers will need to review existing arrangements.
• A 90% rate of tax is to apply to certain performance related bank bonuses.
• Changes have been introduced to the taxation of pension arrangements, which increase the tax and social insurance cost of contributions. Further measures were flagged for introduction over the coming years but it remains to be seen whether the new Government will pursue these changes.
• An increase of 2% in the rate of tax applying to interest on deposits and profits/gains from investments in life assurance policies and investment funds has been introduced. For deposits, the rate of deposit interest retention tax (DIRT) will increase to 27%. For both domestic and foreign life assurance policies and investment funds, the rate of tax will increase to 27% for payments made annually or more frequently, and to 30% for payments made less frequently than annually.
• The Finance Act gave effect to a number of Double Taxation treaties. Treaties with Albania, Hong Kong, Kuwait, Montenegro, Morocco, Singapore and United Arab Emirates came into force on 6 February 2011.

Property Taxes:

• The Finance Act provides for the abolition of most property based reliefs and allowances.  The implementation of these measures has been postponed until after an impact assessment is published. 

Indirect Taxes:

• For years Irish businesses have suffered due to shoppers travelling over the border to Northern Ireland to purchase goods. This activity was encouraged due to the fact that the UK had a VAT rate of 17.5% and the Euro had appreciated significantly against Sterling. From January 2011 the UK Exchequer raised its VAT rate to 20%. The standard Irish VAT rate remains at 21%. These factors along with the Euro weakening against Sterling act as a disincentive for Irish citizens to purchase goods in the United Kingdom.
• The Programme for Government states that the standard VAT rate is not to increase above 23%. It also proposes a temporary (2-year) cut in the reduced rate of VAT from 13.5% to 12%.  This rate applies to labour-intensive services such as construction, hotels, restaurants, hairdressing, newspapers etc. 

Other developments:

• The European Commission has formally requested Ireland to amend provisions which impose an exit tax on companies when they cease to be residents in Ireland. The Commission considers that such taxation serves as a discriminatory penalty on companies wishing to transfer their place of central management abroad.

Contributed by Martin Phelan and Sonya Manzor.