In this article, Peter Vale considers some of the key changes included in Finance Bill 2021 (as initiated).

Finance Bill 2021, published on 21 October 2021, legislates for the tax changes announced in Budget 2022, whilst also including some new provisions and various technical amendments.

The Bill includes some significant legislation, including revised transfer pricing legislation for certain “Ireland to Ireland” transactions, a new set of interest limitation rules and a new digital gaming tax credit.

This article looks at some of the more significant provisions in the Finance Bill, excluding VAT provisions which are covered in David Duffy’s article.

Personal tax related changes

Tax credits and bands

There were some relatively modest changes to tax credits and bands, leaving an average earner better off to the tune of €420 per year.

Remote working

In recognition of the increasing prevalence of remote working, the Finance Bill provides that 30 percent of vouched expenses for light, heat and broadband may now be claimed as a tax deduction by employees. Previously only 10 percent of light and heat expenses could be claimed (and 30 percent of broadband).

Benefit-in-kind (BIK) on electric vehicles

The Bill provides that the existing BIK for electric vehicles will be gradually tapered off so that by 2025 only €10,000 can be deducted from the original market value in assessing the amount subject to BIK. This is slightly disappointing and inconsistent with the Government’s commitment to the green agenda, but also reflective of the increasing prevalence of electric vehicles in the market.

Help to Buy (HTB) relief

In a positive move, the valuable HTB relief will be extended to 31 December 2022, with the enhanced relief of the lesser of €30,000 or 10 percent of the purchase price of the house/build costs or the income tax and DIRT paid over the past four years, applying until the scheduled termination of the relief.

Employment Wage Subsidy Scheme (EWSS)

The Bill provides that the EWSS will terminate on 30 April 2022. The relief will be gradually phased out before then, importantly providing for no “cliff edge” moment. The scheme will close completely to new employers from 1 January 2022 and the reduced rate of employer’s PRSI will cease on 28 February 2022.

Pension changes

There were some helpful measures introduced in respect of retirement benefits, in an effort to remove some long standing complexities. The removal of the AMRF should make it easier for retirees to understand their options in retirement. The removal of the 15 year rule on PRSA transfers will offer more planning opportunities for long term employees and company directors in respect of their occupational pension schemes. The introduction of an ARF option for death in service benefits will also be beneficial to surviving spouses.

Debt warehousing

Following extensive lobbying by the Institute and others, it was good to see a debt warehousing option introduced for certain proprietary directors faced with a potentially large income tax liability, where PAYE deducted on payments to them has been warehoused and thus potentially unavailable as a tax credit. Subject to certain conditions, no interest will be due on the directors’ warehoused debt.

Employment Investment Incentive Scheme (EIIS)

There were some positive changes to the EIIS provisions, including a broadening of the type of fund that can make EIIS investments. While there were certain other welcome changes to the legislation, concerns remain that the legislation is still difficult to navigate and unnecessarily complex, which will continue to impact take-up of what is potentially a valuable source of non-bank funding for SMEs.

Capital taxes

Interest free loans

Heretofore, the free use of money for gift/inheritance tax purposes was by reference to the rate of interest that the lender could obtain on deposit. In the current climate, that was nil or negligible. On enactment of the Finance Bill changes, the calculation will be by reference to the best rate that a borrower could obtain for a similar loan on the open market. This is a disappointing change and will have an adverse impact on existing loans, including in particular the provision of interest free loans from a parent to a child.

Corporation tax changes

Start-up relief

In a positive development, the corporation tax start-up relief has been extended to 31 December 2026, with the window to claim relief extended from three years to five years.

Digital Gaming Credit

In a very positive development for the digital gaming sector, the Finance Bill introduces a tax credit specific to this sector. The relief will take the form of a refundable corporation tax credit available to digital games development companies for qualifying expenditure incurred on the design, production and testing of a digital game.

The proposed tax credit will be a 32 percent credit for eligible expenditure subject to:

• A minimum spend requirement of €100,000, and
• A maximum limit of €25,000,000 per project.

The tax credit can be set against the company’s Irish corporation tax liability, or where there are excess credits, these can be refunded to the digital games development company.

The introduction of the tax credit is subject to European Commission State aid approval.

Interest Limitation Rules

In accordance with the EU’s first Anti-Tax Avoidance Directive, Ireland has been required to introduce interest limitation rules (“ILR”) for accounting periods commencing on or after 1 January 2022.

Broadly, the ILR limits net interest deductions to 30 percent of EBITDA, as measured under tax principles. Net interest refers to interest (or equivalent) income less interest expenses.

While the rules are complex, of note is that if an Irish interest group has net interest costs less than €3 million, the ILR should not apply. However, once breached, the ILR applies to the entire amount of the exceeding borrowing costs – note this “cliff edge” provision.

Also of note is that legacy debt, i.e., loans in place pre 17 June 2016, are not within the scope of the ILR rules. In certain cases, relief may be available by reference to worldwide group ratios. Long term public infrastructure projects, as defined, are also excluded from the ILR provisions.

From a practical perspective, Irish groups with high leverage and interest costs should consider the above regime and carry out a detailed analysis to understand the implications the ILR may have on their future tax charges and cash tax costs.

Anti Reverse Hybrid Rules

The Bill makes provision for the introduction of anti-reverse hybrid rules as required in the second EU Anti-Tax Avoidance Directive.

The anti-reverse hybrid rules bring certain tax transparent entities (e.g., Irish partnerships) within the scope of Irish corporation tax where the entity is 50 percent or more owned/controlled, as defined, by entities resident in a jurisdiction that regard the entity as tax opaque and, as a result of this hybridity, some or all of the hybrid entity’s profits or gains are subject to neither domestic nor foreign tax.

Transfer Pricing

The Bill makes two significant amendments to Ireland’s transfer pricing regulations. Firstly, the Bill broadly exempts Ireland to Ireland non trading transactions from transfer pricing rules, subject to certain exceptions. Secondly, the Bill brings the Authorised OECD Approach (AOA) into Irish domestic law in respect of the attribution of profits to an Irish branch or permanent establishment of a foreign company.

The revision of the existing transfer pricing rules for Ireland to Ireland transactions is a very welcome development. While the provisions apply to chargeable periods beginning on or after 1 January 2022, it is understood that Revenue will examine transactions in earlier periods by reference to the new legislation, which is also welcome.

Property based tax changes

Zoned Land Tax

A new zoned land tax has been introduced to replace the vacant site levy. The change is likely in response to the relatively low yield since the introduction of the levy in 2017. The new land tax applies an initial 3 percent tax to the market value of zoned residential land, with an apportionment due where the zoning is mixed. There is a two year lead time for existing zoned land, with a three year lead time for land zoned after 1 January 2022. The tax will be paid on a self-assessment basis and administered by Revenue.

Stamp duty

The Bill provides for certain changes and clarifications in respect of the legislation introduced in May 2021 regarding the acquisition of multiple housing units, which broadly applied a new 10 percent stamp duty to such purchases. It is worth noting that while technically the amended legislation will not take effect until the passing of the Act, it is understood that in practice Revenue will apply the new legislation retrospectively and in line with existing published guidance.

Non-Resident Corporate Landlords

From 1 January 2022, non-resident corporate landlords will be subject to Irish corporation tax (as opposed to income tax) on Irish sourced rental profits and gains. This will increase the tax rate from 20 percent to 25 percent, i.e., similar to the position for resident corporate landlords. It will also ensure that non-resident landlords are within the interest limitation rules outlined earlier. Finally, perhaps unintentionally, non-resident landlords will also now be within the enhanced provisions of section 840A TCA 1997, following Finance Bill changes, which could impact on the deductibility of interest on loans previously taken out to acquire Irish rental property.

Miscellaneous

Revenue Powers and publications

The Bill includes some welcome amendments in respect of our penalty regime, codifying certain existing practices, as well as some amendments to the rules regarding the publication of tax defaulters. Of particular note is that no settlement will be published where the tax at stake is less than €50,000. Previously, the threshold was €35,000, which included the tax, interest and penalties.