Financial Services has been saved
What a difference a year makes! Budget 2022 was delievered as the country emerged from a global pandemic and against a backdrop of moving to recovery and “striving for the best”. However, Budget 2023 is delivered earlier and underpinned by the cost-of-living crisis.
As a consequence, there have been no meaningful changes in the Budget announcement today which fundamentally impact the financial services sector. Similar to the Budgets of 2021 and 2022, it broadly remains “business as usual” for the financial services sector with today’s announcements on Budget 2023.
Similar to action taken last year, the Banking Levy which was due to expire at the end of 2022 has been extended again for another year and a review of the future application of the Banking Levy will be undertaken.
In addition to the review on the Banking Levy, the government also announced that reviews will commence on the use of the Section 110 (Securitisation) regime and a working group would be established to consider the taxation of funds, life assurance policies and other investment products. Furthermore, a review will also be undertaken of the REIT and IREF regimes to consider how these structures can support housing policy objectives.
Budget 2023 has also extended the Key Employee Engagement Program (“KEEP”) until the end of 2025 and Special Assignee Relief Programme (“SARP”) until 2025 which assist in attracting and retaining key talent in Ireland. Some enhancements are expected to KEEP in Finance Bill 2022 and the qualifying income of SARP will be increased to €100,000.
Who will be affected?
There are some developments which merit attention and action by the financial services industry.
In particular, the Government reiterated its commitment to the OECD inclusive framework agreement on Pillar One and Pillar Two. This also comes at a time when the chairman of an EU tax subcommittee was also looking for a renewed assurance that Ireland is still committed to a minimum corporate tax rate of 15%. This will impact those in the financial services industry with turnover of more than €750 million. In addition to the work required to give effect to the minimum corporate tax rate under Pillar 2, the Department of Finance will also give further consideration to a move towards a territorial corporation tax system.
When? What to do now?
With the publication of technical papers and guidance on Pillar 2 from the OECD earlier this year and draft EU directive and model rules, it is important that financial services groups with turnover of more than €750million start to undertake modelling and impact analysis in respect of the increased corporation tax rate and reporting of current and deferred tax.
As the Department of Finance starts to commence reviews on the Securitisation, REIT and IREF regimes and establish working groups on the taxation of funds, life assurance and investment products, it will be important that the financial services industry carefully considers the scope of these reviews and terms of reference of the working groups so that the voice of the financial services industry is heard during these deliberations. Engagement with industry groups and professional bodies will be important in that regard.
In addition to the above, a reminder that the impact of last year’s Budget 2022 and Finance Act 2021 are continuing to have implications for FY2022 for some in the financial services sector with the introduction of the Interest Limitation Rules (“ILR”) late last year. While many companies in the financial services sector may not be required to submit their FY2022 corporate tax returns until later in 2023, it is important that due care and consideration is given to these rules sooner rather than later. The rules introduced last year may have a material impact on the effective tax rate of a company and have cash tax implications. Where applicable, the calculation of any restriction on tax relief as a result of the ILR may be time intensive and complex and in-house Finance and Tax functions are strongly encouraged to examine in detail the application of the provisions to your own circumstances as early as possible to identify the potential impact on the corporation tax liability for accounting periods commencing on or after 1 January 2022. Furthermore, the ILR introduces new concepts and definitions which may mean that supplementary financial accounts analysis will be required which, for the initial periods at least, may require significant manual intervention. To minimise recurring compliance work, it is recommended that an early stage mapping of financial accounting and tax rules be undertaken so that the impact of the rules is known as early as possible.
It is understandable that the focus and priority of today’s Budget announcements were centred on the cost-of-living. However, it was a missed opportunity to fuel the “Ireland for Finance” strategy for the development of Irelands financial services sector and enhance the role that the Financial Services and FinTech sector could play in the attractiveness of Ireland as a location for Sustainable Finance, FinTech and Digital Finance.
The recommitment to a minimum corporate tax rate (under Pillar Two) will continue to provide the financial services industry with stability and clarity on Ireland’s position in the advancement of Pillar Two. It will also reiterates Ireland’s existing position on Pillar Two and provides clarity on the matter to other EU and OECD countries.
It is important that there is proactive engagement by the financial services industry with the Government and Department of Finance on the reviews to be undertaken in respect of the Securitisation, REIT and IREF regimes and the taxation of funds, life assurance policies and other investment products. In addition to these developments, certain companies in the financial services industry may need to start considering the implications of a potential move to a territorial corporation tax systems.
In line with prior years, the release of Finance Bill 2022 in the coming days should also be closely monitored for any legislative changes that may not have been announced today but may impact the financial services sector.
Finance Bill 2022: Key Provisions
Financial Services | VAT Exemption Clarifications
Finance Bill 2023 confirms VAT exemption for certain financial funds which are registered in other EU Member States and subject to the Undertakings for Collective Investment in Transferable Securities Directive 2009/65/EC and the Alternative Investment Funds Managers Directive 2011/61/EU. This ensures such funds are treated the same as equivalent financial funds registered in Ireland.
Section 110 (Securitisation) companies holding ‘qualifying assets’ in the form of plant and machinery are removed from the VAT exemption for fund management. This will come into effect from 1 March 2023. Agency services related to the management of certain financial services undertakings (as set out In Paragraph 6(2) of Schedule 1 VAT Consolidation Act 2010) are not exempt from VAT.
Finance Bill 2023 provides welcome clarification on the treatment of foreign exchange movements arising to an Irish trading company/ branch which is assessable to corporation tax at 12.5%. In particular, a new definition for a “relevant monetary item” has been inserted into the relevant section in order to amend the treatment of gains or losses resulting from foreign exchange movements in certain circumstances relating to trading activities. This amendment expands the definition to include trade debtors and trading bank accounts and allows for foreign exchange gains or losses in respect of such items to be taxed in accordance with the amount included in a company’s income statement.
Interest Limitation Rules: Technical Amendment
Finance Act 2021 introduced Part 35D into the Taxes Consolidation Act 1997 to implement the interest limitation rules (“ILR”) as required by the EU Anti-Tax Avoidance Directive (“ATAD”). These rules limit corporation tax relief on net interest expenses of companies to 30% of EBITDA (subject to specific group and equity ratio provisions and other exclusions) and came into effect with respect to accounting periods commencing on or after 1 January 2022. Finance Bill 2022 introduces some technical amendments which apply for accounting periods commencing on or after 1 January 2023. For example, these amendments include a substituted definition of “consolidating entity” and tweaks to the definition of “interest equivalent”.
Investment Management and Reporting
An amendment is made to the provisions pertaining to a Material Interest in an Offshore Fund and clarifies that an authorised unit trust (where the general administration of which is carried on in Ireland) will not be treated as an offshore fund solely on the basis that its trustee is an Irish branch of a company resident in another EU or EEA Member State.
New Reporting for Exempt Unit Trust (EUT), Common Contractual Fund
(CCF) and Investment Limited Partnership (ILP)
An annual statement in relation to the assets and business activities of an Exempt Unit Trust (EUT), Common Contractual Fund (CCF) and Investment Limited Partnership (ILP) will now require additional information. The additional information to be reported includes, for example, the net asset value of the EUT, CCF and ILP. In certain circumstances, a penalty is also
introduced where there is failure by the managers (or partners in the case of an ILP) to submit an annual statement or if an incomplete/ incorrect statement is submitted.
Enhancements to Key Employee Engagement Program (“KEEP”): Held for Committee Stage Draft legislative provisions relating to Key Employee Engagement Program are being held over for introduction at Committee Stage of the Bill. As indicated in Budget 2023 and on release of Finance Bill 20022, the Minister of Finance confirmed that the clear intention remains to provide for the buy-back of KEEP shares by the company from the relevant employee and to raise the lifetime company limit for KEEP shares from €3 million to €6 million. Changes to broaden out the relief to allow for group structures and more flexible arrangements as regards employees are also being brought into effect.