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Finance Bill introduces enabling provisions for introduction of IFRS in Ireland Back  
A number of changes were introduced in the Finance Bill 2005 of relevance to the finance and financial services sector, including enabling provisions in relation to the use of International Financial Reporting Standards (IFRS) for taxation purposes in Ireland.
IInternational Financial Reporting Standards (IFRS) came into force for companies listed on EU stock exchanges as of January 1st, 2005, and the Finance Bill contains ‘enabling’ provisions in relation to the use of IFRS for taxation purposes.

Where in future a company prepares its individual company accounts on the basis of IFRS, the Bill provides that such IFRS based accounts will be used as the starting point for the calculation of taxable trading profits. The Bill provides for the following:

- The inclusion in taxable trading income of unrealised gains or losses on certain financial instruments where such gains or losses are included for accountancy purposes in a company’s profits or losses.
- Where one company within a group is using IFRS and another company within the group is using GAAP, any transaction between those companies must be accounted for, for tax purposes, using a single accounting standard if a tax advantage could otherwise arise.
- Trade-related interest will continue to be allowed as a trading expense whether or not the interest is treated for accounting purposes as revenue (i.e. noncapital expenditure).
- No tax deduction is being allowed for share-based payments (including employee share options) notwithstanding that such expenses are taken into account for accountancy purposes in calculating profits or losses. Currently such payments are not tax deductible and do not appear in the profit and loss account.
In relation to the treatment of intangible assets and research & development:
- borrowing costs, which are currently tax deductible as an expense of the trade, will continue to be so treated notwithstanding how they are to be treated under IFRS;
- interest will not qualify as expenditure on research and development for the purposes of the tax credit introduced in the 2004 Finance Act;
- expenditure on R&D that is capitalised will still be tax deductible;
- expenditure that, to date, qualifies for the R&D credit will continue to qualify for the credit.

As respects accounting adjustments made at the point of moving to IFRS for the treatment of financial instruments and revenue recognition, any related adjustment to taxable profits in respect of those amounts are to be made over a period of five years.

Capital duty/holding company regime
Section 119 of the Finance Bill confirmed the reduction of capital duty, that was announced in the Budget in December, from 1 per cent to 0.5 per cent in relation to transactions effected on or after December 2nd 2004. This will make the holding company regime more attractive, but the industry is still calling for a complete abolishment of the duty to bring it into line with other jurisdictions.

Section 49 amends the taxation regime introduced last year for Headquarters and Holding Companies in Ireland in regard to the valuation of certain shareholdings in such companies. This will satisfy the requirements of the European Commission’s clearance of the scheme as not being a state-aid.

Dublin’s funds industry is pleased with the inclusion in the draft legislation of a provision which allows for the taxation of a non-UCITS CCF (Common Contractual Fund) as well as a UCITS CCF.

CCFs were introduced in 2003, and allow the establishment of a tax transparent asset pooling UCITS structure into which only pension funds can invest. The industry predict that the total size of this market could exceed €500 billion, but has been held back up until now due to the fact that securities such as hedge funds and property were not eligible to be included in the fund. With the introduction of a non-UCITS CCF this issue has now been resolved, and expectations are high that this sector will take off.

Savings Directive
Last year’s Finance Act contained provisions implementing the Taxation of Savings Directive. As part of the provisions of this Directive, agreements were to be entered into with certain third non-EU European countries whereby those countries adopted equivalent measures to those set out in the Directive. The Bill provides for the implementation of these third-country agreements. The date of application of the EU Savings Directive is being changed from 1 January 2005 to 1 July 2005 and there are also some technical amendments to the legislation. In addition, the benefits of the EU Interest & Royalties Directive and the Parent/Subsidiaries Directive, accorded to EU member states are to be extended to Switzerland in accordance with the Swiss agreement concerning the EU Savings Directive.

Life assurance
From 1 April 2000 new tax rules have applied to collective investment funds, e.g. unit trusts (the ‘gross roll up’ regime). Under these new rules, tax is not charged on the income or gains of the fund as they arise. Instead, tax at 23 per cent (‘exit tax’) is levied when payments are made out of the fund, subject to some exceptions.
New Court-approved arrangements are being put in place, under which investment managers are appointed to manage the investment of the Court funds, including beneficiary funds of minors and wards of court. The Bill provides that any change of investment managers by the Courts Service for beneficiary funds of minors and wards of court will not give rise to an exit tax at that stage.

Pan-European pensions
According to the Minister, Section 19 of the Bill brings Ireland’s pension tax rules into line with EU law by removing any possible discrimination between pension providers in the State and pension institutions from another Member State. Ireland is obliged to do this under the IORP Directive, which will be transposed into iris law shortly, and which will allow for the creation of occupational pension schemes for employees in any EU Member State. While a true pan-European pension market is still some time away, these measures put Ireland at the forefront of the market.

Stock lending and repo transactions
Under current legislation, an exemption from stamp duty applies to stock lending and repo transactions where the time period within which those transactions must be completed is six months. The Finance Bill introduces the welcome extension of this time period to 12 months. It is likely, according to PricewaterhouseCoopers, that on the back of this amendment, a similar extension will apply to the period within which such transactions must be completed in order to avoid being treated as a disposal and reacquisition of the securities involved for corporation tax purposes.

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