budget 2022 Ireland Inc. and Foreign Direct Investment

Perspectives

Ireland Inc. and Foreign Direct Investment

Budget 2023

Key measures

We are just shy of one year since Ireland signed up to the OECD global tax reform agreement. The result of the OECD Pillar 2 proposals is that, once implemented, the minimum effective rate of corporation tax for companies that are part of groups with revenues of €750m and above will increase to 15%. As negotiations regarding the implementation of such proposals continue at both an OECD and EU level, it is no surprise that the Minister referenced Ireland’s ongoing engagement as part of the international tax reform discussions in his speech. The Minister’s reference to a preference for coordinated, multi-lateral action suggests that Ireland will not take action in advance of an agreed EU Directive. Whilst these developments continue, this demonstrates Ireland’s continued commitment to the international tax reform while also offering certainty for companies into the future.

The Minister also reaffirmed the commitment to the 12.5% rate of corporation tax for relevant businesses and this certainly is welcome.

Given the pace of international tax reform it is vital that other areas of the tax system and economy are adequately served to ensure that Ireland remains a competitive location in which to invest and grow businesses and the Minister acknowledged this in his speech.

With that in mind, the Minister provided for amendments to the payable element of the Research & Development (“R&D”) tax credit, to ensure it aligns with the new international definitions of refundable tax credits and this amendment is welcome. We expect that such amendments will ensure that US multi-nationals (MNCs) will continue to be able to benefit from these credits despite changes to the US foreign tax credit regulations and to ensure that the R&D tax credit regime is neutral from a Pillar 2 perspective.

The Minister also announced an extension of the end date for the Knowledge Development Box (KDB) regime by 4 years. The KDB gives an effective rate of tax of 6.25% for companies engaging in innovation and qualifying R&D activities. Albeit there has been a low uptake of the regime since its introduction, it does encourage the development of the knowledge economy in Ireland. Based on current proposals, the attractiveness of the existing KDB regime will be eroded as a result of the proposed Pillar 2 rules, with no specific carve out in the EU Directive on Pillar Two for patent boxes. Accordingly, we also welcome the announcement that the effective rate of the KDB will increase to 10% that will come into effect from a date to be set by commencement order. The policy document released by the Department of Finance today notes that the commencement of this rate will be determined by reference to international progress on implementation of the Pillar 2 Subject to Tax Rule, with the expectation that this will occur at some point during 2023.

The film corporation tax credit will be extended beyond the current end date of 2024 to the end of 2028. It was acknowledged that this is in recognition of the long production cycle for audio-visual productions.

In Budget 2022, the Minister announced the introduction of a tax credit for the digital gaming sector. The relief will take the form of a refundable corporation tax credit for expenditure incurred on the design, production and testing of games. The relief will be available at a rate of 32% on up to €25m per project and is subject to commencement orders. There was no update today in terms of when this credit may commence.

The Minister did however announce that he has tasked his officials to explore the opportunities for Ireland in the ‘unscripted production sector’ to encourage investment and employment in this sector. We await further details as this develops.

The Minister referenced that in the coming months serious consideration will be given to the options available for Ireland to move towards a territorial corporation tax system.

Finally, we welcome the Minister’s reference to the extension of the Special Assignee Relief Programme to 2025 given that supplementing the talent that Ireland offers with secondees from abroad has been a common model for Foreign Direct Investment (“FDI”).

Who will be affected?

A wide number of companies will be positively impacted by the measures introduced as part of Budget 2023 – from SMEs to large multi-national groups that can claim reliefs such as the R&D tax credit and KDB regime.

When? What to do now?

Similar to last year, there is an element of “watch this space” particularly around the international tax reform measures and how this will impact on our Irish corporation tax code. Critical technical discussions will need to continue over the coming months in line with the framework of the political agreement and we expect further consultation with the Department of Finance on Ireland’s transposition of the rules. Consideration should however continue to be given to the existing transitional arrangements that are currently live for intragroup asset transfers that occur post 30 November 2021.

For the changes announced today however, businesses should consider the impact of same and we also await the additional detail once Finance Bill 2022 is published.

Our view

It is no surprise that Budget 2023, being a cost of living budget, is reflective of the challenging atmosphere that we are currently operating in as a result of factors including risks to European energy supplies, capacity constraints and inflationary pressures not seen for decades.

In light of the challenges, the ongoing international tax developments and the potential impact of such developments for Ireland, it is vital that active steps are taken to ensure Ireland will continue to be regarded as an attractive location for FDI, both in terms of tax and non-tax matters. Budget 2023 contains many measures for the improvement of many non-tax FDI competitive factors including housing, education, infrastructure and this is welcome.

In terms of tax matters, the extension of the end date for KDB and changes to the R&D tax credit regime are welcome. However, given the ongoing international proposals, it will be important that we continue to assess such proposals and make the necessary changes required to ensure we remain a competitive location for FDI. For example, reference to consideration of changes to our worldwide system of taxation are welcome and we encourage the Minister and his Department to continue to engage with stakeholders as these developments progress to ensure Ireland remains an attractive location for investment.

Finance Bill 2022: Key Provisions

  • The amendments announced to the Research & Development
    (“R&D”)
    tax credit as part of Budget 2023 have been reflected in
    Finance Bill 2022. As a reminder the changes were made to ensure that the payable element of the R&D tax credit aligns with the new international definitions of refundable tax credits. The amendments reflect that there is now a three-year fixed payment schedule and that taxpayers have the option to call for payment of their R&D tax credit or request it is offset against other tax liabilities. These amendments will apply for accounting periods on or after 1 January 2022 and this is welcome. It is expected that such amendments will ensure that US multi-nationals (MNCs) will continue to be able to benefit from these credits despite changes to the US foreign tax credit regulations and to ensure that the R&D tax credit regime is neutral from a Pillar Two perspective.
  • In Budget 2022, the Minister announced the introduction of a digital gaming tax credit. The relief will provide a refundable tax credit at a rate of 32% of qualifying expenditure, subject to a maximum spend of €25 million per project. The relief was subject to EU approval and following same, a commencement order. On Tuesday 27 September 2022, the European Commission approved the introduction of the credit, subject to some minor technical amendments being made to the legislation to ensure the credit complies with the EU State Aid rules. These amendments are therefore reflected in Finance Bill 2022 and do not significantly alter the previous provisions. A commencement order is now required to facilitate the introduction of the relief and we understand that further details regarding the projected date of commencement will be announced in the near future.
  • DAC 7 extends the scope of the existing provisions on exchanges of information and administrative cooperation between EU Member States by requiring digital platforms to collect and report information on the income realized by sellers offering certain services. Finance Act 2021 transposed the DAC 7 requirements into Irish tax legislation. Finance Bill 2022 makes amendments to these existing DAC7 provisions. These amendments include changes relating to the domestic implementation of the automatic reporting obligations under DAC7 and changes to enable Revenue to access data that has been collected for anti-money laundering and terrorist financing reasons when enquiring into transactions that involve obscuring the beneficial ownership of assets for the purpose of avoiding reporting under DAC7. The provisions also provide for the transposition of the OECD Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy and the Model Reporting Rules for Digital Platforms: International Exchange Framework and Optional Module for Sale of Goods “Model Rules”. Given these reporting rules apply to platform operators from 1 January 2023, these changes should be considered carefully by relevant taxpayers.
  • Provisions that disapply exemptions against Controlled Foreign Companies (“CFCs”) resident in jurisdictions listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes are amended to take account of the October 2022 update to the list. This will take effect for CFCs with accounting periods beginning on or after 1 January 2023.
  • Amendments have been included in relation to Section 757 TCA 1997 that deals with the patent rights. Firstly, the provisions in Finance Bill 2022 provide that CGT group relief can apply where conditions are met for intra-group transfers of patent rights, similar to the relief which is available to intra-group transfers of patents. In addition Finance Bill 2022 clarifies that that the sale of a patent is chargeable to capital gains tax, whereas the sale of patent rights for a capital sum is subject to tax as income. These clarifications are welcome. 
  • Irish tax provisions provide that foreign exchange movements on ‘relevant monetary items’ will, for corporation tax purposes, be treated as part of profits or losses of a company’s trade rather than subject to capital gains tax. Finance Bill 2022 amends these provisions by inserting a new definition for a “relevant monetary item”. The impact of same is to expand the definition to include trade debtors and trading bank accounts. As a result this will allow for foreign exchange gains or losses in respect of trade debtors and non-Euro currency deposits held in a trading bank account to be treated in the manner that currently applies to foreign exchange gains or losses on trade creditors and Euro currency deposits held in a trading bank account. This amendment is welcome.
  • Interest limitation rules, in line with the EU Anti-Tax Avoidance Directive, were provided for in Finance Act 2021 and are effective from 1 January 2022. Finance Act 2022 includes technical amendments, the aim of which is to ensure that the interest limitation and associated preliminary tax rules operate as intended and  includes a clarification of the operation of the exemption for interest on legacy debt. Given 2022 is the first year that these rules apply, if not done so to date, taxpayers should be modelling the impact of same and in particular in light of preliminary tax deadlines for 2022 tax periods.
  • Changes to Irish transfer pricing provisions were included to update the definition of “transfer pricing guidelines”. The result of same is that the transfer pricing rules will need to be construed, as far as practicable, in accordance with the 2022 version of the OECD Transfer Pricing Guidelines. The rules previously referred to the 2017 version of the OECD Transfer Pricing Guidelines. This change is applicable for chargeable periods commencing on or after 1 January 2023.

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