| Finance Bill fails to fully deliver for international sector |
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| The Finance Act 2006 should have marked a watershed as a nationwide international financial service industry emerges from the IFSC umbrella. Whilst containing some welcome features, it failed to act in a number of key areas and even more disappointingly made unannounced changes which have left many investors wondering what other planks for inward investment policy might disappear overnight, writes Brian Daly. |
Let’s be clear: the abolition of capital duty and relaxing the leasing ring-fence on the utilisation of leasing capital allowances are positive developments. However the restriction of the remittance basis was disappointing and has certainly caused inward investors to wonder whether the mantra about a stable and consistently positive environment for inward investment is as true today as it has been in the past.
 | | Brian Daly, Editor, Tax Monitor |
In addition the abolition of gross roll-up for life policies and investment funds has all the hallmarks of an ill-considered and not fully thought through reaction to a domestic problem which has very significant knock-on negative consequences on the vitally important international part of our economy.
This approach to the framing of tax legislation must be corrected or we will pay an economic price. There are understandable pressures in the Department of Finance in having to deal with EU concerns. However, the ease with which the Revenue Commissioners now seem to be able to get Government to put through changes they want without proper time being given to fully consider the broader implications, is a worrying trend which needs to be responded to.
The consultation process which sees the industry making requests for changes has got to be reciprocated with clear indications from Government on areas they see that need to be changed to rectify domestic concerns, and allow the international financial services sector to have an appropriate input into the framing of a response which does not negatively affect their sector. Given the experience of how Government has responded to the Social Partners’ representation at the Partnership Talks, perhaps it’s time for the critically important international financial services sector to have a more clear voice in those discussions.
Welcome measures
Capital duty has been abolished at last. Ireland had become an anomaly amongst the Member States in retaining this duty, whose abolition has for a long time been official EU policy. It really should have gone a long time ago.
The restrictions on the use of leasing capital allowances have been relaxed. This follows lengthy discussions between the Department of Finance and the financial services industry. These discussions procured significant improvements in the drafting of the measure, even after the Bill was originally published. The engagement of the department with the leasing sector and KPMG regarding this problem was excellent and a model of what the relationship between the Financial Services sector and the Public Sector should be.
Certain leasing companies will now be permitted to offset their leasing capital allowances not only against income from the leasing of machinery and plant, but also income from the financing of similar machinery or plant, lease management income in relation to the leasing of such machinery or plant, gains on the disposal of such leased plant, and ancillary activities.
To avail of this widened scope for the offset of capital allowances, it is necessary that at least 90p.c. of the activities of the leasing company should consist of such leasing, financing, lease management, disposals etc and that the activities of the company, or of those parts of the parent group of which it is a member, which are located in treaty territories, should consist wholly or mainly of leasing plant and machinery.
The relaxation of the ring fence would mean that capital allowances on leased plant and machinery, to the extent that they are not required for offset against the income from leasing, may be offset against eg interest income on loans financing the purchase of similar types of plant and machinery. That offset against interest income is only on loans to finance the purchase of plant and machinery of a type similar to that leased by the company. The significance of this restriction is that it limits the possibility of the offset of capital allowances on big ticket items (eg aircraft, rail locomotives) against loans financing small ticket items (eg computing equipment).
Remittance basis
The remittance basis of taxation of expatriate staff was a major element in Ireland’s international tax competitiveness. It has been severely damaged in a knee-jerk reaction to trade union concerns relating to the construction industry. In any other country such a fundamental change would have been flagged by the publication of a Green Paper and extensive consultation, in order to determine the best way forward. In Ireland, the damage was done with an over-night announcement and an implacable refusal to take on board reasonable suggestions on alternative approaches which could have largely dealt with the underlying problem without totally eliminating a provision which has produced many benefits for the country.
Funds roll-up
The ending of the gross roll-up regime for funds is an example of the pursuit of a narrow agenda without regard to the wider damage being done to the financial services industry. Nothing about the manner in which this has been done would suggest that the measure has been properly thought through.
The story started a year ago with legislation imposing a charge of tax on a deemed disposal of the investments of funds at the end of a seven year cycle. This was introduced without prior consultation. At the last moment the Minister was prevailed upon to defer the implementation of the section. The Finance Act 2006 has extended the measure to mutual funds, and has brought it into effect with an eight year cycle. It says a lot about the degree of analysis lying behind the measure that the original proposal was one which would not only damage the financial service industry internationally, but would domestically create an uneven playing field as between life assurance products and mutual funds.
Irish based life companies and funds now have an administrative burden placed on them in terms of
identifying which policy and unit-holders attract the new tax, and which (the vast majority in the case of our international financial services industry) do not. Unfortunately, this added layer of administrative cost in a highly competitive sector may well cause companies affected to either close their products to Irish residents entirely, or consider their location.
There is no reason to suppose that direct investors in equities turn over their investments any more frequently than do investors in life policies or funds. The worry that has led to this measure seems petty and misplaced and the potential impact on a financial services industry that is largely international in its focus, damaging and disproportionate.
Irish resident investors in foreign based life policies and funds will also have to account for the tax, but on a self-assessment basis. Hopefully it will not be the case, but it is difficult not to suspect that such Irish resident investors in overseas products will fail to note the passing of each eight year anniversary on a fairly widespread basis. After all, who keeps a diary for eight years ahead? What is the point of setting up a system where inadvertent non compliance is likely to be widespread?
Interest
The existing unilateral exemption from withholding tax on Irish source interest on quoted Eurobonds was available only where the bonds were in bearer form. This has now been extended to registered bonds. This is a welcome development.
Irish withholding tax on interest payments relieved by a patchwork quilt of partial exemptions, and the technical liability to Irish tax by non residents receiving Irish interest, even where no withholding tax is applicable, remains unaddressed despite lengthy discussions on this problem going back over years.
The Finance Act has taken no action on the effective ending of the IFSC exemption from the treatment of interest paid to associated companies resident in non Treaty States by financial service trading companies, as a non deductible distribution subject to dividend withholding tax. This has been under discussion for years, and it had long been foreseen that it needed to be tackled by 31 December 2005. But nothing has been done.
Without changes in these areas, Ireland’s ability to sustain a strong base of international treasury operations will be fatally damaged. I think it is time for the international banks to turn the heat up on the government to make changes in this area.
Conclusion
There were thankfully some positive changes in this year’s Act, but unfortunately there were too many errors and omissions. We need a much more robust process to properly consider the impact on the critically important international financial services sector of legislative changes designed to solve other issues within the economy. Perhaps it’s time for the international financial services sector to be represented more clearly in the Partnership discussions so their views can be even more directly heard within Government. Our recent prosperity seems to be breeding complacency and perhaps it might even be called arrogance. Hopefully we will not have to pay for this later. |
Brian Daly ia a partner at KPMG
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| Article appeared in the March 2006 issue.
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