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| The Finance Bill has provided some welcome reforms for the financial services sector. Unfortunately the process of creating the tax regime the industry requires was not completed. It would be tremendous if Government could make a commitment to deal with these matters in the next Finance Bill. |
Welcome reliefs
The consultations between the Department of Finance and the financial services industry over 2006 have produced some welcome changes to the tax code that should help the industry in its battle to remain internationally competitive. | | Brian Daly |
- The reduction of the top rate of income tax to 41p.c. will benefit most financial service workers. It will help contain wage inflation in a sector that has to compete internationally.
- Double tax relief is extended to foreign tax suffered by overseas branches of an Irish resident company which are not in a jurisdiction with which Ireland has a double tax agreement. Additionally, double tax relief in respect of all foreign branches is now permitted on a 'pooling' basis. This means that the limit on the foreign tax will be the Irish tax on all foreign branch profits rather than on a branch by branch basis.
This is a very helpful development for the many financial services companies who now operate on a branch basis across a number of jurisdictions, some of which are outside the EU in non-treaty jurisdictions.
- An amendment has been made to foreign exchange matching rules with retrospective effect to 1 January, 2006. Where a trading asset denominated in a foreign currency is matched by redeemable share capital in that currency, the exchange gains and losses on a mark to market basis can be offset in computing tax, even if the gain or loss on the share capital is unrealised at year end. This corrects a technical oversight in the original legislation, but one of some importance.
The option to match currencies is also extended to a company whose functional currency is not the Euro.
- New stamp duty reliefs are introduced to replace market maker relief, broker dealer relief and closings relief. The operation of those reliefs had become controversial over the last two years with the Revenue taking an interpretation of them which was at variance to the manner in which they had been understood and operated in the past by the stockbroking community.
The new reliefs seem more transparent and are not explicitly linked to time periods regarding transactions in shares, which is where some of the difficulties arose in the past. There remain some possible ambiguities in the definitions of business which is excluded from the reliefs, including investment making and management and transactions in relation to connected parties. Nonetheless the reliefs represent a successful outcome to consultations between the industry and the Revenue, following the breakdown of the previous reliefs.
- The pensions sector will benefit from a reduction in red tape. It will no longer be necessary for each pension product to be individually approved by the Revenue. Instead products conforming to an approved template will be regarded as being approved.
- The option to treat interest paid to a 75p.c. non resident associate as not being a distribution is extended to associates resident outside treaty states. Hitherto this relief on a world wide basis was available only to IFSC licence holders. Unfortunately, such a payment of annual interest would attract withholding tax as it applies to interest payments, which is a basis which is less liberal than the dividend withholding tax regime that would have applied to a distribution. This represents another half-step in the lengthy process of bringing the tax regime nationwide for financial service companies into line with that which experience in the IFSC had already proved was necessary.
The unwelcome and the unavailable
Unfortunately there seem to be in the Finance Bill as many unwelcome measures, and missing from it necessary but unprovided measures, as there were welcome measures.
- The penal stamp duty on 'plastic cards' has not been reduced. You would think that the need for army escorts for cash movements would suggest that we need to encourage and not discourage the move to a cashless economy.
- Stamp Duty remains on transfers of shares of Irish registered companies. This merely accelerates the impetus to the use of companies registered outside of Ireland.
- The technical liability of non residents to tax on Irish source interest income (generally unsupported by a withholding tax or other means of collection) remains to embarrass the financial services sector in dealings with international customers.
- Large financial services companies still must estimate their corporation tax liability and pay 90p.c. of it one month before year end, or suffer penal interest charges. There is no justification for this requirement which flies in the face of all sense or understanding of business. But then, how many of our policy makers have ever run even a corner shop? There has been some relaxation in the rules in that the 90p.c. payment requirement can now be met on a group basis, enabling overpayments in one group member to offset underpayments in another.
- Holders of approved retirement funds (ARFs) are still required to draw an annual 3p.c. (or be taxed as it they had) without regard to the age of the ARF holder or the adequacy of the fund to provide for old age.
- While representations by the industry have secured some small concessions on the administrative burden represented by the deemed 8 yearly disposals by Irish policy and unit holders of investments inside gross funds and life assurance policies, the case for placing this tax entirely on a self assessment basis has not been acted on. Petty domestic concerns are allowed to hamper an international industry without any overview being imposed at a political or top policy level.
- The remittance basis of income tax for expatriates seconded to Ireland has not been reintroduced notwithstanding that models have been suggested for doing so without permitting it to ' leak' in an unfocused way to non strategic areas of the economy, including building sites and the hospitality sector where the original trade union concerns surfaced. Capital Acquisitions Tax continues to apply to seconded expatriates after 5 year residence, despite the overwhelming arguments for a remittance basis there also.
- The Bill did not take the opportunity to abolish the 25p.c. rate of Corporation Tax, which the recent Cadbury Schweppes ECJ judgement suggests may be the best solution to the discriminatory features of the domestic franked investment income regime. This was discussed in the February issue of KPMG's Tax Monitor.
- The exemption from DIRT of some older account holders is based on a declaration to be made to the deposit holder that inter alia total income does not exceed a certain limit. This could create uncertainty for such a deposit holder as to whether they are obliged to review their files to consider the validity of such a declaration. It might be preferable if the exemption were based on notification from the Revenue to the deposit holder that a particular account is exempt.
- The measures in the Bill in relation to the cap on tax reliefs, and on the rules relating to the transfer of assets overseas by individuals, have served to make already complex legislation even more unintelligible.
Focus and consultation
The Finance Bill demonstrated, in the area of stallion relief, what can be done when the Revenue and Department of Finance get together with a mobile internationally focused area of the economy to sort out a problem. The present state of the financial services sector is evidence of what was achieved decades ago when there was a focus on getting the tax regime right for a strategic growth area. However there currently seems to be a tendency to deal with the financial services area in piece meal fashion, with domestic considerations, often of little consequence, being allowed to do damage to it.
Another critical area, whilst not a Finance Bill issue, is our treaty network. I would like to see a public commitment to meet the modest targets suggested by the Irish Taxation Institute for the negotiation of new double tax agreements. A significant improvement in our international tax competitivness could be achieved by some beefing up of staff in the international section of the Revenue.
The State takes a huge tax take out of the financial services area in the form of corporation tax, PAYE, PRSI, stamp duties, and VAT (indirectly largely). The State is heavily reliant on the sector for the administration of taxes such as DIRT, dividend encashment tax and insurance premium levy. The State is a major stakeholder in the financial services sector. It should act as a major stakeholder with a determination to secure long term growth in the value of its stake. Too often it seems more like a portfolio investor, interested only in short term dividends. |
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| Article appeared in the March 2007 issue.
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