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Tuesday, 16th April 2024
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Business taxation Back  
Some of the technical measures in the Finance Act have received little publicity but are of importance to business. Some effort has been made to bring our tax legislation into harmony with European Union requirements. The potential for tax planning created by our multiplicity of tax rates in the corporate area has been addressed by a ring fencing of losses.
EU proofing the law
The Finance Bill has amended tax law to take account of two cases decided before the European Court of Justice (ECJ), neither of which directly involved Irish taxes.

Group relief
The case of ICI v Colmer was a UK case which was referred to the ECJ. It held that it was not possible under EU law to confine ‘group relief’ from various taxes to groups of companies defined solely in terms of companies resident in an EU State. In the Finance Act 2000 Ireland reacted to this case by introducing group relief for trading losses as between Irish resident subsidiaries of EU resident parent companies, and also extending it to Irish branches of EU resident group members. That provision appeared to meet the requirements of the case fully in respect of trading losses.

However in dealing with capital gains tax, group relief was extended only to Irish resident subsidiaries of EU resident parents, but was not extended to branches of EU resident companies. That latter omission was criticised at the time and has now been corrected. It is therefore now possible for the Irish resident subsidiary of a French resident parent (to take an example) to transfer an asset to the Irish branch of that parent without triggering capital gains tax.

Foreign tax credits
The second case to which the Irish legislation has reacted was the Saint Gobain case. This French case went to the ECJ and established that an EU Member State must administer its double tax agreements so as not to discriminate between companies resident within the State, and branches in the State of companies resident in other EU Member States.

This judgement was something of a sensation. Many had thought that double tax agreements were outside the scope of EU law. Such double tax agreements typically limit many of their benefits (though not all) to persons resident in one or other of the treaty states. Now the ECJ were saying that the treaty benefits in some cases must also be given to a company not resident in either state, provided the company is resident in the EU and has a branch in either state.

The legislation affects only those double tax reliefs which are administered by Ireland. Principally this will affect credit for foreign taxes on dividend income received by the Irish branch of a non-resident company although it extends to foreign taxes on all forms of income. The change therefore is most likely to improve the position of financial service companies.

Ring fencing losses and charges
Other aspects of the Budget have been less favourable. At present some corporate trading income is taxed at 25 per cent; some at 20 per cent, due to fall to 12.5 per cent by 2003; some is taxed at 12.5 per cent, and some is taxed at 10 per cent. Corporate capital gains are in the main taxed effectively at 20 per cent. Trading losses can be offset against other income or capital gains in the same year or the immediately previous year. So can certain ‘charges on income’ which principally are interest payments and patent royalty payments. Obviously a company would wish to offset trading losses and charges against the component of its profits which is taxed at the highest rate.

There has been a long standing restriction which prevents losses in trades normally taxed at the 10 per cent rate, from being offset against income taxed at a higher rate, or against capital gains. The restriction has now been extended to losses from almost all forms of trading, ie not only that taxed at the 10 per cent rate, but that taxed currently at either 12.5 per cent or 20 per cent. The restriction is also extended to trading charges relating to these trades. Companies therefore have largely lost the right to offset trading losses and trading charges against capital gains and against investment income.

It is understandable that the Government would wish to impose some restriction on the ability to offset losses and charges arising from low tax activities against gains on profits from high tax activities. But the total prohibition of offset seems over the top. It is fundamentally unfair that a company which overall has lost money in a year should nonetheless have to pay tax. This can arise if its trading losses are not offset against its investment income or capital gains. A more fair approach would have been to restrict the right of set off so that it is proportionate to the tax rates involved e.g. losses arising from a 10 per cent taxed activity would be set off as to ?2 of losses against every ?1 of capital gains taxed at a 20 per cent rate.

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