Ireland’s Budget 2017 (again) affirms 12.5 percent corporate tax rate, addresses “section 110” firms

by Professor James Stewart

Minister for Finance Michael Noonan, in his speech accompanying Budget 2017 released today, reiterated Ireland’s firm stance on maintaining a low corporate tax rate and signaled changes to the taxation of financial intermediaries, known as section 110 firms. The budget is Ireland’s first expansionary budget since the financial crisis began in 2008.

“I want to now state that Ireland’s 12.5 percent corporation tax rate will not be changed and nobody is asking for it to be changed,” the Minister for Finance said. Noonan characterized Ireland’s tax regime as “fair but competitive in the future.”

Interestingly, there was no discussion in the budget statement of Ireland’s decision to appeal the EU’s decision in Apple, no estimation of likelihood of a successful appeal, and no discussion of the possible future revenue impact if the appeal is unsuccessful (potentially two years corporate tax revenues).

Strong outlook

Strong economic growth has caused unemployment to fall, tax receipts to increase, and government net borrowing as a percentage of GDP to fall from -32% in 2010 to an expected small surplus in 2017.

Thus, Ireland is no longer constrained by EU rules on Excessive Deficit Procedure and has used the opportunity to increase spending on items such as the state old age pension, reduced taxes, and increased tax allowances.

An important reason for the reduced deficit was an increase in corporate tax revenues from €4.6 billion in 2014 to €6.8 billion in 2015. Receipts have continued to increase, and are expected to total €7.6 billion in 2017, according to a 2016 Revenue Commissioners report.

The surge in corporate tax payments is due to increased profitability, particularly in the MNE sector. This, in turn, mostly explains the much reported increase of 26.3 % in GDP between 2014 and 2015 (see CSO, 2016).

A major issue in framing Ireland’s economic and tax policy has been the decision of the UK to leave the European Union. This is of particular significance for Ireland because of its considerable trade, investment, and population movement with the UK.

The reason for concern is not a potential lower rate of growth in the UK post Brexit, but rather the expected devaluation of the Sterling relative to the Euro. Since July 2015, the Euro has changed in value from 70 pence Sterling to a current rate of 90 pence Sterling. A key economic post Brexit strategy of the UK is likely to be a relatively weak currency. The measures announced in the Budget 2017 do not address the potential adverse impact of such an exchange rate policy.

The sectors likely to be most affected are traditional manufacturing (textiles, clothing, leather, wood and paper products) and food and beverage, according to Department of Finance report 2016b; but, sectors such as tourism could also be adversely affected.

Section 110 firms

The Minister for Finance also suggested that further changes will be made to the tax rules associated with special purpose vehicles (SPVs), known as section 110 firms (referring to section 110 of Irish Taxes Consolidated Act 1997).

“I am aware that further amendments are necessary to address other issues arising in relation to funds and property,” Noonan said.

Ireland has become a prime destination for the establishment of SPVs because, in effect, these firm’s profits are taxed at a zero or near zero rate. Because interest on borrowed funds may vary, with, for example, the value of assets, interest received by a section 110 firm is deemed have been paid out of already taxed profits and not subject to further tax.

Most of these firms are located at the Irish Financial Services Centre. They have zero employees and are often owned by a charitable trust. At the end of December 2015 there were over 1600 section 110 firms with over €750 billion in gross assets, and, while the vast bulk of these assets are located outside Ireland, the income arises in Ireland.

In September the Minister for Finance published a proposed amendment to tax law “to address the perceived misuse of section 110 and to ensure that the tax provisions are ring-fenced for bona-fide securitisation purposes.”

The purpose of the amendment was to ensure that, in cases where the assets on which the property loans are based are located in Ireland, the income and capital gains arising from those assets would be taxed in Ireland.

Only section 110 firms that own financial assets that derive value or the greater part of value from land in Ireland will be subject to the new limits on tax deductibility of interest. As such, the vast majority of section 110 firms will not be affected, including those owning loans based on property located abroad, or those engaged in leasing aircraft or plant and machinery.

These changes will be made in the forthcoming Finance Bill. It is likely that this very favourable tax treatment of financial intermediaries in Ireland will attract scrutiny from other tax jurisdictions.

For documents related to the budget, see:

• CSO (2016)

• Department of Finance (2016a), Estimates of Receipts and Expenditure for the Year Ending 31 December 2017

• Department of Finance (2016b) Getting Ireland Brexit Ready

• Department of Finance (2016),  Ireland’s International Tax Strategy

• Revenue Commissioners, (2016), An Analysis of Corporate Tax Receipts 2014-2015