Ireland: Finance Bill 2017 restricts IP capital allowance, addresses MLI

by Mary Cosgrove, National University of Ireland

Ireland’s Department of Finance on 19 October, published Finance Bill 2017 which, when enacted, will give legal effect to the measures announced in the Minister’s Budget 2018 speech of 10 October.

These measures include small reductions in income tax for most earners, exemption from taxable employment income of the value of an electric car, and introduction of a tax efficient share option regime aimed at small- and medium-sized enterprises.

Intellectual property allowances

September saw the publication of the review of Ireland’s corporation tax carried out by economist Seamus Coffey.

Only one recommendation from that report has been reflected in the Finance Bill (the others are to be subject to further public consultation). The measure relates to capital allowances on intellectual property.

In 2009 a capital allowance regime for IP was introduced in Ireland for the first time, granting a tax write down for a wide range of intangible assets even if acquired from a related company.

However, these allowances could only be used to shelter up to 80% of the income arising from such assets in any year.  In a move which coincided with the closing of the “Double Irish” structure for new entrants, the 80% restriction was removed beginning 2015.

The impact was immediate, with Ireland’s stock of intangible assets increasing by around €250 billion in the first quarter of 2015.

As the profits reported from such assets have been offset by the increased claims for capital allowances, Coffey recommended that the 80% restriction be reinstated. The Finance Bill provides for such a move, but only in respect of intangible assets acquired from 11 October.  Therefore, the provision will have no impact on those groups which brought their intellectual property onshore before Budget day.

Legislating MLI

The Finance Bill sets out the process for Ireland to ratify the multilateral instrument (MLI) to implement the tax treaty measures in the OECD/G20 base erosion profit shifting (BEPS) action plan., which Ireland signed in June 2017.

Ireland’s ratification will require an order from the Minister for Finance. No date has been indicated for the finalization of this process.

Sugar tax

The mechanics of a “sugar tax” on sugar sweetened drinks are detailed in the Finance Bill. The tax will apply at a rate of either 20c or 30c per litre depending on the level of sugar.

The tax, which will be paid on a monthly basis, will be paid by the first person to supply the drinks within Ireland. The tax will not come into effect until the Minister makes a commencement order. The expected date of introduction is 1 April 2018.

Property measures

A number of tax initiatives have been made to improve the supply of property for housing. These include the shortening of the holding period required for certain disposals of properties to be made free of capital gains tax, which normally applies at a rate of 33%.

From 1 January 2018, land and buildings acquired between 7 December 2011 and 31 December 2014, which have been held for between four and seven years, will be exempt from capital gains tax.  In addition, in an attempt to encourage vacant residential properties into use, tax deductions will be granted for certain pre-letting expenditure.

The stamp duty rate on the transfer of non-residential real property has tripled from 2% to 6% with effect from 11 October.

However, following intense lobbying from the farming community, the Finance Bill allows for certain transfers of farmland to be made at a rate of 1%.  There remains some discontent within farming circles and so this measure may not yet be finalized.