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Finance Bill ignores transfer pricing Back  
In the lead up to the December 2001 Budget there was much speculation about whether the introduction of a transfer pricing regime would be announced by the Minister for Finance. While the introduction of transfer pricing is certainly on the government’s agenda, there was no mention of it in the Minister’s Budget speech and nothing has been included in the Finance Bill 2002 published on 7 February.
Turning to what is included in the Finance Bill, while there are 137 sections and 6 schedules, the Bill is certainly shorter than in previous years and contains far fewer surprises.

Interest withholding tax
Currently, subject to a number of exemptions, interest must be paid under deduction of withholding tax at the standard income tax rate (20 per cent). One of these exemptions applies to interest payments to banks and such interest payments may currently be made gross. The Finance Bill extends this exemption to interest paid by companies on loans taken from lenders that carry on a lending trade but are not banks.
This change to the withholding tax regime potentially benefits two types of companies; companies engaged in lending activities in the Irish market but which do not hold a banking licence (“quasi-banks”) and treasury companies based in Ireland (largely in the IFSC) which will have the opportunity to extend their operations to corporates in the Irish market where, until now, the application of withholding tax would have acted as a disincentive.

Deposit Interest Retention Tax
Currently, interest paid by banks on Euro Commercial Paper (ECPs) and certificates of deposit is subject to the DIRT regime. In order to facilitate international bond issues from Ireland by banks, Revenue practice has been to allow the payment of interest gross on ECPs, certificates of deposit and medium term notes without the need for the completion of non-resident declarations provided these instruments are not sold into the Irish market and certain other conditions are satisfied.
The Finance Bill introduces a new exemption from DIRT for ECPs and certificates of deposit that are in bearer form provided certain conditions are satisfied. It appears that this exemption does not replace the existing Revenue practice referred to above, which should continue to apply, although Revenue have yet to confirm this.
While any liberalisation of the DIRT regime on ECPs and certificates of deposit is good news for banks raising funds from Ireland, the new exemption is so restrictive that it is likely to be unworkable in practice. Firstly, the exemption only applies where interest on ECPs or certificates of deposit is paid by the bank itself or an Irish paying agent and therefore it doesn’t apply where there is a foreign paying agent. Secondly, where ECPs or certificates of deposit are held in a recognised clearing system, details (including the tax reference number) of Irish resident recipients of the interest must be collected and returned to the Revenue. Thirdly, where ECPs or certificates of deposit are not held in a recognised clearing system, the recipient of the interest must provide a declaration to the bank in order to receive interest gross. Fourthly, it appears that the new provisions will make interest on ECPs and certificates of deposit held by Irish resident individuals liable to income tax at their marginal rate as opposed to the standard rate of income that applied up to now.
It is particularly disappointing that the model adopted in the investment funds industry was not applied to ECPs and certificates of deposit. The investment funds model provides an exemption from exit tax (the equivalent of DIRT) once units in a fund are held in a recognised clearing system and there is no requirement for the fund to identify the residence of investors or collect tax reference numbers or declarations from Irish residents. Clearly, this new exemption for ECPs and certificates of deposit falls far short of creating a level playing field with the investment funds industry.

Foreign withholding taxes
Currently, IFSC corporates and certain other 10 per cent companies receive unilateral credit relief for foreign tax withheld on interest received from countries with which Ireland has no double tax treaty. The Finance Bill extends the availability of this credit to corporate financial traders outside the IFSC, which are taxed on the interest as a trading receipt. This is a welcome development for Irish companies involved in lending to non-tax treaty countries.

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