Tax Developments Promoting Growth of Indigenous Business and - - PowerPoint PPT Presentation

Tax Developments Promoting Growth of Indigenous Business and Attracting Foreign Direct Investment

Mark Barrett

Overview

Part 1: Tax Developments Promoting Growth for Indigenous Business Part 2: Tax Developments Attracting Foreign Direct Investment

Part 1 Tax Developments Promoting Growth for Indigenous Business

Tax Developments for Indigenous Business

• Corporation Tax Exemption for Start-up

Companies

• Understanding Tax for New & Back to Work Hires
• The Employment and Investment Incentive

Scheme (EIIS) – Raising Tax Efficient Finance

• VAT – the Essential Update

Corporation Tax Exemption for Start-up Companies

• Exemption from Corporation Tax for Start Up

companies

• First introduced in 2009:
• Originally:
• New Company
• Relief for Profits/Gains of New Trade,
• Full relief where €40,000 or less
• Marginal relief re: profits €40,001 to €60,000
• No relief where profits exceed €60,000
• Available for first 3 years.

Corporation Tax Exemption for Start-up Companies

• In 2011 the Relief was amended to link to

levels of employment:

• For accounting periods beginning on or after 1

January 2011:

• Relief linked to level of Employer‟s PRSI
• To max of €5,000 per employee
• Cap of €40,000 overall
• Extended in 2010, 2011 and 2012,
• FA2012: Now for companies that commence to

trade in 2012, 2013 or 2014

Corporation Tax Exemption for Start-up Companies

• Exemption from Preliminary Tax
• New or Start-up Company
• CT liability of €200,000 or less
• For their first accounting period
• Not required to pay PT for that first accounting

period

• Pay final CT liability when submit CT return

Understanding Tax for New & Back to Work Hires

Revenue Job Assist Incentives for Employers - IT59

• Double Wages deduction for up to 3 years
• Wages
• Employer‟s PRSI
• Employee criteria
• Unemployed for 12 months immediately before hiring
• During 12 months in receipt of certain benefits from DSP, including

jobseeker‟s benefit/allowance, etc. or “signing on”, or certain schemes including Job Bridge, FAS training courses, Community Employment Scheme

• Qualifying Jobs:
• Minimum 30 hours per week
• Capable of lasting at least 12 months
• Exceptions: commission only / grant aided / previous employees unfairly

dismissed / redundancies w/in previous 26 weeks / proprietary director or spouse/civil partner

Understanding Tax for New & Back to Work Hires

Year Salary PRSI 10.75% Total Double deduction allowable in accounts Saving@ 41% 1 €30,000 €3,225 €33,225 €66,450 €27,244.50 2 €30,000 €3,225 €33,225 €66,450 €27,244.50 3 €30,000 €3,225 €33,225 €66,450 €27,244.50 Total €81,733.50

Example from Revenue IT59:

The saving to a sole trader under the Revenue Job Assist scheme, liable to income tax at 41%, employing a qualifying employee in a qualifying employment on a salary of €30,000 is as follows: In addition: employer may qualify for Employer Job (PRSI) scheme (no employer‟s PRSI for the first 18 months)

Understanding Tax for New & Back to Work Hires

Revenue Job Assist (Long Term Unemployed taking up a Job) Incentives for Employees - IT58

• Additional allowance for employees
• The relief in the first year of employment is €3,810 plus €1,270 for each child
• Reducing to two-thirds of that amount in Year 2 and one-third in Year 3
• Criteria (as for employer):

Continuously unemployed for at least 12 months, and either,

• In receipt of Jobseekers Allowance, Jobseekers Benefit, One Parent Family

Payment, Blind Persons Pension, Disability Allowance or,

• With effect from the 01/01/06 Invalidity Pension for at least 12 months or

Illness Benefit for at least 36 months

The Employment and Investment Incentive Scheme (EIIS)

Introduction:

• The EIIS is a tax incentive scheme. Investors who purchase

eligible shares in a qualifying company will be granted tax relief, thereby reducing the cost of their investment

• The EIIS is designed to promote investment in Irish companies

and to foster job creation

• The EIIS provides an excellent opportunity for companies to

raise capital

• EIIS replaced the BES (overlap between the two schemes)

EIIS

Facts for Investors:

• Qualifying Individual:
• Irish tax-resident individual
• Not connected with the Company at any time during the

specified period (starting two years before and ending three years after share issue)

• Relief of up to 41% of the investment:
• 30% initial relief in year 1 (specified relief)
• 11% contingent relief in year 4, if Company has increased

either employee numbers (and no reduction in average pay) or its R&D expenditure (not a specified relief)

EIIS

• Holding period: 3 years (BES was 5 years)
• Investment: Minimum €250, Maximum €150,000 pa
• Capital Gains Tax:
• Where the shares are disposed of, the full acquisition cost can be

deducted from the proceeds in an arms length sale

• However, if the shares are disposed of at a loss, the allowable loss for

Capital Gains Tax purposes will be reduced by the relief granted

• Tax avoidance:
• Relief is not available unless shares are subscribed for and issued for

bona fide commercial purposes and not as part of a scheme or arrangement the main purpose of which is the avoidance of tax

• Investment in shares which are subject to agreement, options or

guarantees which provides for the disposal by investors at a price other than market value do not qualify for relief

EIIS

• Qualifying Company:
• Company size criteria (see next slide)
• Investment raised for purposes of carrying on

Relevant Trading Activities; or R&D

• Relevant Trading Activities
• Broadly defined – will include most trades
• Excludes: Financing Activities, Dealing in commodities,

shares etc.

• Trading / Commence to trade w/in 2 years of share issue
• Green Energy Companies: Application for „grid connection

agreement‟ deemed to amount to commencing relevant trading activities

• R&D Activities:
• Expend at least 30% of investment on R&D activities.

EIIS

Size: Small Company Medium Company Employee Limit 50 Employees 250 Employees Financial Limit €10m Turnover / €10m Balance Sheet €50m Turnover / €50m Balance Sheet Additional Requirement N/A Located in „Assisted Area‟ Or „Not beyond start-up stage‟ The company must be a Micro or Small enterprise or be a Medium sized enterprise which is located in an „Assisted Area‟

“Assisted Area”: In summary „assisted areas‟ have been described as all areas in the State with the exception of counties Dublin, Meath, Kildare Wicklow and Cork (but including the Cork Docklands) “Not beyond start-up stage”: “Start-up stage” is not defined in the ‟Community Guidelines on State Aid to Promote Risk Capital investments in Small and Medium- Sized Enterprises‟. However the phrase „start-up capital‟ is defined as meaning “financing provided to companies, which have not sold their product or service commercially and are not yet generating a profit, for product development and initial marketing”

Comparison of the BES and EIIS

BES EIIS Qualifying investment €150,000 pa €150,000 pa Relief 41% in year of investment 30% in year of investment 11% contingent, year 4 Specified relief yes 30% - yes 11% - no Holding period 5 years 3 years Funds company can raise €1.5m pa €2m total. €2.5m pa €10m total. Qualifying companies Limited: Manufacturing and international traded services Much Broader: Companies containing „Relevant Trading Activities‟ with special provisions for R&D and Green Energy companies

Feedback to date

• Three year period too short
• Impact of High Earners Restriction
• Exclusion of Medium Sized

companies/foreign owned companies

VAT – the Essential Update

FA 2012:

• Standard rate increased to 23% from 1 January 2012
• Reverse charge on supplies of construction services, in

the State, between connected parties

• Travel agents margin scheme – removal of provision

allowing for issuing of a document re VAT on qualifying accommodation at qualifying conference

VAT – the Essential Update

FA 2012:

• Duty to keep records – 6 years for liquidated companies
• Second reduced rate of 9% - re: Admission to Heritage Facilities,

Open Farms (previously exempt lettings), District Heating

• „Bread‟ – new definition
• Refund orders – Suite of measures to prevent abuse of refund
• rders: assessment of tax due, interest payable, fixed penalty

€4,000

Part 2 Tax Developments Attracting Foreign Direct Investment

Tax Developments & FDI

• FED in 2012 – What You Need to Know
• R&D Tax Credits – The Essentials

FED in 2012 – What You Need to Know

• Foreign Earnings Deduction (FA2012)
• To encourage Irish businesses to seek opportunities in the dynamic BRICS

economies (Brazil, Russia, India, China and South Africa)

• Deduction allowed against employment income of employees who perform

their duties in BRICS countries

• FED does not extend to remuneration in the form of BIK or termination

payments

• Deduction is for purposes of income tax only, (not PRSI or USC). Max

value: €14,350

• Maximum deduction €35,000
• FED is a „specified relief‟ for the high earners restriction

FED

• Deduction is based on the ratio of days spent in BRICS countries in

the year

• The Employee must spend a minimum of 60 days in BRICS states
• Only visits lasting a minimum of 4 days count towards the 60 day

threshold

• Formula:

Where:

• D = number of qualifying days in a year of assessment
• E = qualifying income
• F = aggregate number of days in the year of assessment that the

individual held a relevant office or employment

FED

FED will not apply to income from an office or employment which is:

• Chargeable under the remittance basis;
• Qualifies for the relief for key employees carrying on research and

development activities (s472D TCA97);

• Qualifies for the „split year residence‟ relief (s822 TCA97);
• Qualifies for the „cross border worker‟ relief (s825A TCA97), or
• Qualifies for the new special assignee relief programme (s825C

TCA97).

R&D Tax Credits The Essentials

Overview of R&D Regime:

• Why R&D Tax Credits?
• Downside of favourable 12.5% CT Rate
• 12.5% CT deduction + 25% R&D Tax Credits = 37.5% tax benefit
• R&D Tax credits
• Available based on 25% of incremental qualifying R&D spend
• FY 2003 base year (note FA2012 change to first €100k of spend)
• Various developments in recent years:
• R&D tax credit increased from 20% to 25%
• Cash refunds for excess R&D credits from Irish Revenue
• Lobbying continues:
• Increase subcontracting limits
• Practical challenges of evidencing 2003 base year
• More accessible to SME‟s

R&D

• Utilisation of 25% credit
• Profitable Company
• Shelter Irish CT liability
• Excess can be refunded
• Loss-Making Company
• Carry back prior year
• Cash Refund of excess credits over 3 Years (subject to limit re CT liability in

prior 10 years / „Payroll liabilities‟ in the period and prior period)

• Time limit
• 12 months after the end of the accounting period in which the

expenditure is incurred.

R&D

• Subcontracting costs
• FA 2012 – Limit on outsourced spend amended to the greater of:
• Up to 5%/10% of R&D expenditure outsourced to universities/third parties,
• r
• €100,000 (as matched by the company‟s own R&D spend)

Note: Revenue feedback on claims have indicated that in some cases the 3rd party or university / institute were in fact not carrying on R&D activities but rather providing support to the claimant company

• Grants
• R&D credit is net of grants received

R&D

• Two tests must be satisfied:

Science Test: Qualifying R&D? Accounting test: Are the costs relating to qualifying R&D activity?

R&D

R&D

Science Test: R&D activities means:

1. Systematic, investigative or experimental activities, 2. In a field of science or technology, 3. Being one or more of the following categories of R&D:

• Basic

Research (experimental/theoretical work without a specific objective)

• Applied Research (work undertaken for a specific objective);
• r
• Experimental

Development (producing new/improved materials, products, devices, process, tools, systems

• r

services) Guidelines &Legislation:

http://www.revenue.ie/en/tax/ct/research-development.html

R&D

Accounting Test: Staff costs and overheads attributable to R&D activities, including:

• Salaries of R&D personnel
• Indirect supporting activities
• Ancillary activities
• Plant and machinery
• Third party royalties

R&D

Qualifying Direct Costs:

• Direct staff costs
• Raw Materials
• Direct overheads
• Plant & machinery
• Fixtures & fittings
• Computer software & hardware costs
• Sub-contracted R&D costs (subject to restrictions

previously discussed)

• Buildings (special improved rules apply)

R&D

Qualifying Indirect Costs:

• Rent
• Rates
• Heat
• Security
• Light
• Travel
• Administrative staff
• Senior staff
• Insurance
• Other

N.B. Apportionment Method Used

R&D

Non qualifying expenditure:

• Market research, market testing, market development, sales

promotion

• Routine testing & analysis for the purposes of quality or quantity

control

• Software fault reporting
• Bug fixing
• Alterations of a cosmetic or stylistic nature to existing products,

services, or processes whether or not these alterations represent some improvement

• Legal

& administration work in connection with patent applications, records and litigation

R&D

FA 2012 - Amendments

• Partial volume basis
• (first €100,000 irrespective of 2003 base)
• Outsourcing limits
• Rewarding of “key employees” by transferring R&D

credit to employee to reduce his/her tax liability

• Key employees are defined as employees who:
• Performed 75% of their duties in “the conception or creation of new

knowledge, products, methods and systems” in the relevant accounting period; and

• 75% of the cost of employment qualify as R&D expenditure; and
• Excluding directors and individuals holding more than 5% of the shares
• f the company or an associated company
• Cannot reduce the employee‟s effective tax rate below 23%

R&D

Revenue feedback on types of errors - 2012

• Scientific test - substantially correct
• Accounting test - problematic
• Definite time-line
• Over-estimation of time/resources allocated
• Lack of timely records and documentation
• Outsourcing – issue that many providing support services

rather than R&D, records and documentation.

Revenue Self-Review Questionnaire

R&D

Our Experience with Revenue Queries:

• Volume of Revenue Queries
• Likely future trends:
• Ensure supporting documentation in place
• Ensure qualifying costs captured appropriately
• More use of external technical experts
• Focus on commencement/cessation dates for R&D

Presenter Details

Presenter:

Mark Barrett, Tax Partner, Moore Stephens Nathans

Contact Details:

Tel: +353 (0) 21 4275176 Email: mark.barrett@moorestephensnathans.com

Thank You