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Recent Ireland tax changes indicate government is still performing balancing act
Over the summer months, Ireland has seen several significant tax developments that could potentially impact MNCs with activity in the region, including an early Budget, large-scale input VAT decision from the High Court, a review of the existing R&D tax credit, FATCA implementation and an EU enquiry into the application of VAT laws into Ireland, Netherlands and Luxembourg. These developments demonstrate the conflict that the government, like those in many other jurisdictions, is experiencing between becoming an attractive location for international investment while generating and maintaining revenue via its tax framework.
Early Budget in line with European semester
The Irish Budget has been moved forward from its usual time of the first week in December to the 15 October 2013, so as to keep in line with the European semester. It is expected that the Finance Bill will be finalised before the end of the year which is much shorter than the normal period for implementation. The government is being urged to encourage entrepreneurship in the Budget by assisting and incentivising businesses to increase employee numbers. It is hoped that the Budget will continue to improve Ireland’s competiveness internationally and encourage international investment in Irish business.
EU Commission launches a preliminary enquiry into the application of tax laws to multinationals in Ireland, Luxembourg and the Netherlands
The EU Commission has embarked upon an informal preliminary enquiry to establish whether Ireland, the Netherlands and Luxembourg are violating state-aid rules in giving tax rulings involving favourable tax treatment to multinationals. The Commission are currently gathering information, and this preliminary enquiry may lead to a more formal investigation. Ireland’s 12.5% rate was approved by the Commission on its implementation and Ireland’s tax system is considered one of the most open and transparent jurisdictions in the world.
Review of the research & development (“R&D”) tax credit
The Irish government is currently reviewing the use and application of the R&D tax credit. The tax credit has been in operation for nearly 10 years and more than 1,200 companies currently avail of it. The review comes at a time when the tax authorities in Ireland are increasing the number of audits on large companies who avail of the credit.
The review is examining, amongst other things, the contribution of the credit to productivity and growth in the Irish economy, and the characteristics and nature of the businesses that avail of the tax credit. The review will also compare the competitiveness of Ireland’s tax credit against competitor jurisdictions. This month, the President of the Irish Tax Institute has said that the review must not only focus on the cost of the credit to the exchequer but must also focus on the benefits of the credit. The R&D tax credit has played a critical role in enhancing the attractiveness of Ireland as a location for international investment. The review is expected to be complete by the Budget 2014.
Input VAT decision
In a recent case with the High Court in Ireland, Ryanair was denied credit on input VAT for professional fees incurred in its bid to take over Aer Lingus. The Court has affirmed the decision of a lower court which held that Ryanair was not allowed to deduct input VAT incurred on professional fees in connection with its bid to acquire all of the share capital in Aer Lingus. The Court based its decision on the fact that, as the bid failed, Ryanair did not provide management services to Aer Lingus and was not in the business of providing management services. Therefore, the expenses incurred on the professional services were not incurred as part of the general costs of the business and were not immediately and directly linked with the output VAT incurred as part of Ryanair’s business of air passenger transport. In reaching this decision the Irish High Court distinguished the facts in this case from those of the ECJ decisions in the Cibo (C-16/00) and Rompelman (C-268/83) cases. Ryanair are appealing the decision to the Supreme Court.
The US treasury have postponed the implementation of FATCA in Ireland from January 2014 until July 2014. Ireland was the fourth country to sign the agreement with the US in December 2012. This marks the second time implementation has been postponed.
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On the issue of Ireland’s tax treatment of multinationals, it is clear that Ireland is not a tax haven – which has been confirmed by the Head of the OECD. It is hoped that the government will continue to enhance Ireland’s internationally competitive tax regime in Budget 2014, including no change to the 12.5% rate corporate tax rate, but we hope to see further measures in this budget to support Irish and multinational business and in turn promote Irish job creation. As above, the Irish government continue to balance the attractiveness of the country for international investment with the need to generate revenue during the global economic recovery.