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Tuesday, 23rd April 2024
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Finance Act changes to help Ireland face new threat Back  
Ireland remains a key location for foreign direct investment, but is facing a strong threat from the EU accession countries and low-cost Asian locations. However, changes in the Finance Act 2004, should make Ireland a very attractive location for regional headquarters and holding companies when looked at it in conjunction with other features of the Irish tax regime writes Jim Dennehy.
OOver the past ten years, the country has developed on many levels. Strong economic growth during the ‘90s, coupled with a steady stream of graduates annually has meant that Ireland could capitalise on the business opportunities that existed as a result. It is true to say that businesses in Ireland have embraced change and been rewarded for doing so, and in most cases we have seen substantial growth in nearly all sectors.

International companies setting up operations in Ireland, have played a pivotal role in the ongoing development of the country’s strong business franchise. Based on the success of these operations, other international corporates have been encouraged to set up their European bases there.

The key to a country’s success is its people. Ireland is fortunate to have a young, highly educated workforce. By 2010, some 34 per cent of the workforce will be 25 years old or younger. Each year, in excess of 38,000 graduates will qualify in areas such as business studies, engineering and science this is a significant competitive advantage of Ireland. Company directors are reassured that their Irish operations will develop and grow over time, creating value for their parent companies.

Another reassuring factor is maintaining the base rate of corporation tax in the Irish Republic at 12.5 per cent - it is the lowest rate in the European Union. Another important factor is the solid base of key industries already established in Ireland.

For example, Ireland is home to 13 of the world's top 25 medical devices companies and has developed extensive expertise in this area. The fact that Ireland is the only English speaking country in the Eurozone has also been a major advantage. The USA alone provides 65 per cent of FDI into Ireland. Over 570 US companies are located there, employing over 90,000 people. The Celtic Tiger continues to be one of the more vibrant economies in Europe. With inflation predicted to come in at around 2 per cent for 2004, the Irish economy is in good shape looking into the future.

So are there any clouds on the horizon?
Europe is fast changing, and the accession of 10 new member states will alter the playing field. Competition for FDI from other economies is providing a challenge for the Irish economy. When looking at their options for regional bases, international companies are beginning to consider Eastern Europe where manufacturing costs are very competitive. Also, outside of the European Union, there continues to be strong growth in countries such as India and China, where again the cost base is substantially lower.

As a result of increased competition within the EU, and a trend towards decreasing margins on manufacturing operations here, the country is repositioning itself to move up the customers ‘value chain’. Though there is still value for manufacturing operations in Ireland, the country is undergoing a transition: from an export-oriented manufacturing base to a ‘high value added research and development’ focused European hub.

Economic commentators continue to stress how important it is for us to move up the ‘value chain’ and attract corporate operations in areas such as research & development (R&D). Strong inroads are already being made. Fifty-seven per cent of the medical devices companies in Ireland now have an R&D function.

New opportunities from the Irish Finance Bill (2004)
Minister for Finance, Charlie McCreevy, has introduced a number of changes through the Finance Bill to assist business development. These should increase Ireland’s suitability as a location for regional headquarters and holding companies established in Ireland. Along with the focus on value added corporate operations, and a concentration on research & development activities, Ireland is well positioned for further growth over the coming years.

(i) Research & development
The 2004 Finance Bill introduced a corporation tax credit of 20 per cent for incremental qualifying R&D expenditure incurred by companies in respect of R&D activities carried on by them in the European Economic Area. This credit is in addition to any existing deduction or capital allowances for R&D expenditure. It is important to note, however, that because EU approval is required for this new incentive, the relief is subject to a commencement order from the Minister for Finance.

(ii) Capital Gains Tax (CGT) exemption
An exemption from tax on gains will exist where an Irish company disposes of a shareholding in a company that, at the time of disposal, is resident for tax purposes in Ireland, in another EU Member State or in a country with which Ireland has a tax treaty.

(iii) Dividends
In the case of dividends paid to an Irish parent company, either under double tax treaty provisions or under unilateral credit relief provisions (where no treaty applies), the qualifying shareholding for relief for foreign taxation has been reduced from 25 per cent to 5 per cent of the company. A further provision allows companies to mix the credits for foreign tax on different dividend streams for shareholdings of 5 per cent or more for the purpose of calculating the overall credit (called 'onshore pooling'). Any credit balance unused can be carried forward and offset in subsequent accounting periods. Both these provisions onshore pooling and carry-forward of unused credits are significant improvements on the current situation.

The effect of these changes allows for greater scope in the tax efficient structuring of dividend repatriations and are not just for EU and treaty countries, unlike the CGT relief. These changes should help to make Ireland a very attractive location for regional headquarters and holding companies when looked at it in conjunction with other features of the Irish tax regime.

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