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2001 produced favourable tax developments Back  
From a tax viewpoint Irish business will probably remember 2001 as a year in which there were quite a number of favourable developments which were unfortunately overshadowed by a single major tax increase on both business and employment, says John O’Leary.
The unpleasant item of 2001 was of course the removal of the employers’ PRSI ceiling. This added significantly to the cost of employing people in Ireland and has been particularly hard felt in high value-added sectors such as financial services. The Minister responded to the strong concerns expressed by employers and announced a reduction in the rate of PRSI on employers from 12 percent to 10.75 percent in the December 2001 budget. While this is welcome it is unlikely to restore employers in the high value-added sectors to the position before removal of the ceiling.

Corporate taxation
The corporation tax rate for trading income fell to 20 percent as a step on the way to a 12.5 percent rate by 1 January 2003. The corporation tax rate on passive income stayed at 25 percent while the tax rate on corporate capital gains was also unchanged at 20 percent. However, restrictions were introduced to prevent the offset of trading losses against passive income or against capital gains. While it is acknowledged that some restrictions were necessary in this area, it appears that the government may have gone too far as there are situations where a company makes losses for an accounting period but ends up paying corporation tax. This was effectively acknowledged by the Minister for Finance in the December 2001 budget when he announced the introduction of measures to alleviate this problem.

While the falling rate of corporation tax on trading income is a major boost to the corporate sector, the decision announced in the December 2001 budget to accelerate corporation tax payments to one month before the end of the accounting period will be a significant cashflow and administrative cost for companies.

The increase in rate of capital allowances on plant items to 20 percent was a welcome development as was the extension of a number of reliefs relevant to international structuring. These included the extension of capital gains tax ‘group relief’between an Irish resident subsidiary and an Irish branch of an EU resident company within the same group and the extension of the scenarios in which interest payments to non-resident affiliates are tax deductible.

The Savings Industry
The start of 2001 saw the introduction of a new tax regime for domestic savings products. Up to 2001, the domestic savings industry was protected by the Irish tax regime. IFSC investment funds and life assurance products could not be sold into the Irish market and a penal tax rate of either 40 percent or 42 percent applied to gains on offshore investment funds and life assurance products sold into the Irish market. Investment returns on competing domestic products, whether deposits, investment funds or life assurance products were taxed on an annual basis at the standard rate of income tax.

From 1 January 2001 a ‘gross roll-up’ basis was introduced for domestic products which means that tax is not charged on investment returns as they build up and instead gains on maturity are taxed at 3 percent over the standard rate of income tax. This resulted in the introduction of a whole new range of products by the domestic savings industry. In addition, IFSC providers may now sell into the domestic market under the same tax regime as domestic players and the penal tax rates on offshore funds and life policies sold into Ireland have (for EU, EEA, and OECD based products) been replaced by the lower rate applicable to domestic products.

While savings products enjoy tax deferral, direct investment has the advantage that the investor retains control over his/her investments. Some life companies sought to resolve this issue by launching ‘personal portfolio bonds’ under which the investor retains some control over the assets invested in. However, the Department of Finance perceived this to be an abuse of the new regime and a retrospective surcharge of 20 percent was imposed on these products.

Looking forward?
While certain tax changes were announced in the December 2001 budget it can be expected that, as in prior years, there will be more revelations in the Finance Act. It is difficult to predict future tax changes but two areas to possibly look out for in 2002 are transfer pricing and Personal Retirement Savings Accounts (PRSAs).

The introduction of a transfer pricing regime is certainly on the government’s agenda but it is not clear whether it will materialise this year or be pushed further out.

2002 will hopefully see the introduction of PRSAs which will be a major development for the Irish pension market. PRSAs are personal pension funds which can be taken out by both self-employed persons and employees and, for employees, they hold out the prospect of taking their personal pension fund with them as they move from job-to-job. A Pensions (Amendment) Bill was published in 2001 and it is expected that this will go through the Oireachtas in 2002. The tax piece of the jigsaw will also need to be put in place and this should come through as part of the final legislation.

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