Tax News

Budget 2015 was announced today.

Here is a brief Summary of some of the Taxation Measures for introduction in Ireland in 2015

INCOME TAX

 There will be an increase in the standard rate band of income tax by €1,000 from €32,800 to €33,800 for single individuals and from €41,800 to €42,800 for married one earner couples.

There will also be a reduction in the higher rate of income tax from 41% to 40%.

Artists’ Exemption

 The threshold for the artists’ exemption will be increased by €10,000 to €50,000.

 The Exemption is also being extended to non-resident artists i.e. to individuals who are resident or ordinarily resident in another Member State or in another EEA State.

Foreign Earnings Deduction

 FED is being extended for a further 3 years until the end of 2017 and qualifying countries have been extended to include Chile, Mexico and certain countries in the Middle East & Asia.

 Other changes are as follows:

• The number of qualifying days abroad is being reduced from 60 to 40
• The minimum stay in a country is reduced to 3 days and
• Travelling time is being included as time spent abroad.

 Special Assignee Relief Programme

 The main points are as follows with other details being provided in the Finance Bill:

• SARP is being extended for a further 3 years until the end of 2017 and the upper salary threshold is being removed. 
• The residency requirement is being amended to only require Irish residency and the exclusion of work abroad is also removed.
• The requirement to have been employed abroad by the employer is being reduced to 6 months.

Employment and Investment Incentive

The EII is being amended: 

• to raise company limits
• increase the holding period by 1 year and
• include medium-sized companies in non-assisted areas and internationally traded financial services (These measures are subject to approval from the European Commission).

Hotels, guest houses and self-catering accommodation will remain eligible for a further 3 years and the operating and managing of nursing homes will be included for 3 years.

Seed Capital Scheme

This scheme will now be known as “Start-Up Relief for Entrepreneurs” (SURE).

It has been extended to individuals who have been unemployed up to 2 years.

Rent-a-Room Relief

 The threshold for exempt income under this scheme has been increased from €10,000 to €12,000 per annum.

Water Charges

Tax relief at 20% will be provided on water charges, up to a maximum of €500 per annum.

 This relief will be paid in arrears

 Home Renovation Incentive

 The HRI Scheme has being extended to include rental properties owned by landlords subject to income tax.

UNIVERSAL SOCIAL CHARGE

Incomes of €12,012 or less will be exempt from the Universal Social Charge.

 In situations where the annual income is in excess of €12,012 the tax will be calculated as follows:

€0 to €12,012 @ 1.5%

€12,013 to €17,576 @ 3.5%

€17,577 to €70,044 @ 7%

€70,044 to €100,000 @8%

For individuals with PAYE income in excess of €100,000 per annum they will be liable to USC @ 8%.

 Self-employed individuals with income in excess of €100,000 will be liable to USC @ 11%

 There will be an extension of the exemption from the 7% rate of USC for medical card holders whose total income does not exceed €60,000 (who will now pay a maximum rate of 3.5% USC).

 Individuals aged 70 years and over whose total income is €60,000 or less will pay a maximum rate of 3.5% USC.

CAPITAL GAINS TAX

Property purchase incentive

 The incentive relief from CGT (in respect of the first 7 years of ownership) for properties purchased between 7 December 2011 and 31 December 2014 is not being extended beyond 31 December 2014.

 Where property purchased in this period is held for seven years the gains accrued in that period will not attract CGT.

 Windfall tax

Windfall tax provisions introduced in 2009 are being abolished from 1^st January 2015.

This relates to provisions which apply an 80% rate of tax to certain profits or gains from land disposals or land development, where those profits or gains are attributable to a relevant planning decision by a planning authority.

CORPORATION TAX

R&D Tax Credit

 The 25% tax credit applies to the amount of qualifying R&D expenditure incurred by a company in a given year that is in excess of the amount spent in 2003 (base year).

 This 2003 base year restriction is now being removed from 1 January 2015.

 Three Year Relief for Start-up Companies

 This relief from corporation tax on trading income (and certain capital gains) of new start-up companies in the first three years of trading has been extended to new business start ups in 2015.

A review of this measure will take place in 2015.

Capital Allowances for the Provision of Specified Intangible Assets

 This provides capital allowances for expenditure incurred by a company on the provision of certain intangible assets for use in a trade.

 The use of such allowances in any accounting period is currently restricted to a maximum of 80% of the trading income from the relevant trade in which the assets are used.

 This 80% restriction on aggregate allowances (and any interest expense incurred on borrowings to fund the expenditure) will be removed.

Accelerated Capital Allowances for Energy Efficient Equipment

This is a measure to incentivise companies to invest in energy efficient equipment was due to expire at the end of 2014 however it is being extended to the end of 2017

DEPOSIT INTEREST RETENTION TAX

First time buyers DIRT relief has been introduced which is a relief from DIRT on savings used by first time house buyers towards the deposit on a home.

OTHER AREAS

There have also been changes to Agri-Taxation in terms of Income Tax, VAT (Increase in the Farmer’s Flat Rate Addition from 5% to 5.2%), Capital Gains Tax (Relief for Farm Restructuring), C.G.T. (Retirement Relief), Capital Acquisition Tax (Agricultural Relief) and Stamp Duty (Agricultural leases and Consanguinity Relief).

The 2010 Finance Act introduced a fixed pay and file date for all gifts and inheritances with a “valuation date” after 14^th June 2010.  As a result, the Capital Acquisitions Tax year runs from 1^st September to 31^st August in the following year.

 C.A.T. arising on gifts/inheritances, where the “valuation date” falls within the twelve month period ending on 31^st August in a particular tax year, must be paid and filed with Revenue by the 31^st October of that year.

 What do we mean by “Valuation Date”?

 The “valuation date” is the date on which the property making up the gift or inheritance is valued.  The “valuation date” for a gift is the date the individual receives the gift but determining the “valuation date” for an inheritance is far more complex.

 Section 30(4) Capital Acquisitions Tax Consolidation Act 2003 defines the valuation date as the earliest of the following:

1. the date on which the Executor is entitled to retain the inheritance for the benefit of the beneficiary or
2. the date on which the inheritance is retained for the beneficiary or
3. the date of delivery to the beneficiary i.e. the date on which the inheritance is paid over or transferred to the beneficiary.

 In many estate cases, the date of the grant of probate or grant of administration is generally taken to be the “valuation date.”

The situation can be more complicated in the following situations: 

• where the asset passes automatically on the death of an individual by operation of the law (e.g. where joint property passes by survivorship) or
• where there are several valuation dates for different bequests.  For example some assets may be distributed before the grant of probate which would mean the “valuation date” is the date of transfer or payment and other inheritances, such as the reside, would be valued after the date of grant.

Common Problems

 The main problems for Tax Practitioners and Accountants are as follows:

• The very short time frame between a valuation date in, say, August and the pay and file date of 31^st October in the same calendar year.  In situations where the valuation date is the grant of probate it may not be possible for the Executors to extract sufficient cash before the deadline date.
• The value of the assets can fluctuate greatly between the date of death and the valuation date.  This is especially relevant to property and share values so particular attention should be given to the correct valuation of these assets.
• In the event of a date of death valuation, a beneficiary may not have sufficient information to establish whether or not there is a liability to C.A.T. until after the pay and file deadline.

A date of death valuation arises in the event of a beneficiary having an immediate entitlement to an inheritance. This could arise if a remainder interest is taken on the death of a life tenant or if there is an inheritance of a joint tenant by survivorship.

Compliance

 An IT38 Return should be filed if:

(a) the beneficiary has a CAT liability or

(b) the benefit exceeds 80% of the Tax Threshold Amount.

IT38s must be filed by 31^st October along with any CAT due.

 An IT38 in paper form can only be filed if the individual is not claiming any reliefs or exemptions other than the small gift exemption of €3,000.

 Where other reliefs or exemptions are being claimed then it is essential that the Return is filed electronically through the Revenue Online System in which case the pay and file deadline will be 13^th November 2014.

 Tax Thresholds

 Group A – €225,000 – Generally from parents to children

Group B – €30,150 – In general from brothers, sisters, aunts, uncles, etc.

Group C – €15,075 – Gifts/inheritances from other people deemed to be “strangers in blood.”

 Are there any penalties for late filing?

 If you are up to two months late filing your Tax Return there will be a 5% surcharge of the amount of tax payable up to a maximum of €12,695.00.

 If you file your Return after that a 10% surcharge will be levied up to a maximum amount of €63,485.00.

 What about interest?

 Interest of 0.0219% per day or part of a day will be applied to all late payments of Capital Acquisitions Tax.

If you’ve already made or about to make a disposal of a capital asset (e.g. certain shares, an investment property, a business, etc.) anytime  between 1^st January and 30^th November 2014 you will be obliged to pay your Capital Gains Tax by 15^th December 2014.

 If you decide to wait and dispose of your asset between 1^st December and 31^st December 2014 then your payment will be due by 31^st January 2015.

 What happens if you miss these deadlines?

 Interest of 0.0219% per day will be applied to all late payments of Capital Gains Tax.

 What happens if you make a gain in the first part of the year and a loss in the second part?

 Even if you’ve made an overall loss for the year, you will be obliged to pay the Capital Gains Tax arising on any gain you’ve made in the first part of 2014 by the specific payment date being 15^th December 2014.

 You can then submit your claim for a tax refund in January 2015 if a loss arises in the second part of the year.

 Any tax saving tips?

 Plan the timing of your disposals so that capital gains and capital losses arise in the same period thereby enabling you to offset the losses against the gains and effectively reduce any potential tax liability.

 This can be very useful from a cash flow point of view.

 What about filing obligations?

 You must include details of all your capital acquisitions and/or disposals made in 2013 in your 2013 Income Tax Return. 

 This Return must be filed with Revenue by 31^st October 2014.

 There is an extension to 13^th November 2014 if you are using the Revenue Online System (ROS).

 What happens to individuals who are not obliged to file an Income Tax Return?

 You may file a CG1 Form which can be downloaded from the Irish Revenue website www.revenue.ie

 As with the Income Tax Return, the due date for filing is 31^st October 2014.

 Please be aware, there is no facility to file this Form online which means the 13^th November 2014 extension does not apply to the CG1 Form.

Are there any penalties for late filing?

 If you are late filing your Tax Return but manage to do before 31^st December 2014 there will be a 5% surcharge of the amount of tax payable up to a maximum of €12,695.00.

 If you file your Return after 31^st December 2014 a 10% surcharge will be levied up to a maximum amount of €63,485.00.

The High Earner’s Restriction was introduced in the 2006 Finance Act with effect from 1^st January 2007.  The objective was to limit the use of certain tax reliefs and exemptions and to ensure that high income individuals who were eligible for these “specified reliefs” paid an effective tax rate of at least 20%.

 Changes were introduced by Finance Act 2010 which extended the scope of the restriction to ensure these individuals now pay an increased effective rate of 30%.  From 2010 onwards, the High Earner’s Restriction applies to a much greater number of tax payers which we can see from published figures (*Dáil PQ 25 March 2014)

To whom does the High Earner’s Restriction apply?

 From 2010 the restriction applies to an individual who meets all three of the following criteria:

1. The individual’s Adjusted Income (being the Taxable Income before applying the Specified Reliefs) for the tax year is greater than or equal to the “Income Threshold Amount.”  In general this figure is €125,000 but it may be less depending on whether the individual has ring-fenced income (E.g. Irish Deposit Interest that has suffered Deposit Interest Retention Tax; payments and gains relating to certain foreign life policies; certain offshore payments and gains; gross deposit interest arising in an E.U. member state with an Irish tax rate equal to the D.I.R.T. rate, etc.) and
2. The total Specified Reliefs used by the high earner is greater than or equal to the “Relief Threshold Amount” of €80,000 and
3. The aggregate specified reliefs used by the individual are less than 20% of the Adjusted Income.

How do we calculate the tax?

1. Compute the Taxable Income (ignoring the restriction) (T)
2. Identify any Ring fenced Income (R)
3. Identify the Specified Reliefs used in the calculation of the Taxable Income (S)
4. Compute the Adjusted Income (A) using the formula: A = T + S – R
5. At this point you should check whether you meet all the three criteria necessary for the restriction to apply.  If the answer to one or more questions is NO then the restriction does not apply to the tax year in question.
6. If the answer to all three questions is YES, compute the “Recalculated Taxable Income” using the formula: T + (S – Y) where Y = the greater of (i) the Relief Threshold Amount of €80,000 or (ii) 20% of the Adjusted Income.

The effect of the High Earner’s Restriction is to increase the individual’s taxable income liable to Income Tax at the normal rates.

Example 

Mr A has the following income for 2013:

• Case I Trading Income                                   €200,000
• Case V Rental Income                                    €300,000

He also has Section 23 Type Property Relief of €300,000

Steps:

1. Calculate the Taxable Income (T) 

Case I Trading Income                                         €200,000

 Case V Rental Income                  €300,000

Section 23 Relief                          (300,000)                   Nil

 Taxable Income (T)                                              €200,000

2. Calculate (R) – Mr A has no Ring fenced income

3. The Specified Reliefs (S) = €300,00

4. The Adjusted Income (A) is calculated using the formula

A = T + S – R              €200,000 + €300,000 – Nil = €500,000

5. Does the High Earner’s Restriction Apply
   1. Is (A) i.e. €500,00 greater than or equal to €125,000                   – YES
   2. Is (S) i.e. €300,000 greater than or equal to €80,000                    – YES
   3.  Is 20% of (A) i.e. €100,000 less than the Total SpecifiedReliefs i.e. €300,000                                                                              – YES 

      Therefore, the Higher Earner’s Restriction applies.

       

6. Recalculate the Taxable Income using the formula T + S -Y where Y = 20% of (A) i.e. €500,000 x 20% = €100,000

(T) i.e. €200,000 + (S) i.e. €300,000 – (Y) i.e. €100,000 = €400,000

7. The excess specified reliefs of €200,000 (i.e. €300,000 – €100,000) are available to be carried forward to the next tax year.

 Carry Forward of Excess Reliefs (S.485F TCA 1997)

 Any “unutilised reliefs” in the tax year in question can be carried forward for offset against the individual’s total income in subsequent tax years.

The following points should be kept in mind:

• When the reliefs are carried forward, they are pooled together in a single amount thereby loosing their individual character.
• The excess reliefs will be subject to the same restrictions in the subsequent tax year.
• The excess relief can be offset in the next tax year only after relief has been given for other available tax reliefs.
• Excess specified reliefs will be lost on the death of the individual.
• From 2010 onwards where the excess relief is carried forward for deduction against total income, the excess relief will not be an allowable deduction for calculating PRSI, the Income Levy (when relevant) or Universal Social Charge.

 What items are included in the list of specified reliefs?

 Appendix 3 – list of Specified Reliefs is available on www.revenue.ie and the full list is set out in Schedule 25B of the Taxes Consolidated Acts 1997.

 Here are some of the items included:

• Capital Allowances on Buildings
• Film Relief
• Artist’s Exemption
• Student Accommodation Relief
• Section 23 Type Relief (Property Based Incentives)
• Patent Royalty Income
• Patent Distributions

Examples of what’s not included are:

• Pension Contributions
• Trade Losses
• Capital Allowances on Plant & Machinery except in certain situations where they are claimed by passive traders in a leasing trade
• E.I.I.(Employment Investment Incentive) is no longer a specified relief under Finance (No. 2) Act 2013 where the subscription for eligible shares was made under the scheme between 16/10/2013 and 31/12/2016.
• Medical Expenses, etc.

What about Double Taxation Relief?

 Finance (No. 2) Act 2013 amended how Double Taxation Relief was calculated for those individuals subject to the High Earner’s Restriction.

The formula to be used is:

 Irish Tax (after applying the High Earner’s Restriction)

                      Adjusted Income (A)               

Previously the credit was calculated before applying the High Earner’s Restriction.

 A repayment of an under claimed foreign tax credit is available for individuals who filed a tax return after 1^st January 2008 and who would be entitled to a greater tax credit for double taxation suffered as a result of this new provision than under the pre Finance (No. 2) Act 2013 legislation.

 Compliance Issues

 Any individual subject to the High Earner’s Restriction must file a Form 11 (Self Assessment) and Form RR1 setting out details of the calculations of the H.E.R.

The details to be included in the RR1 Form are:

• The aggregate of the specified reliefs used by the individual in the tax year.
• The individual’s taxable income before the H.E.R.
• The amount of the individual’s recalculated taxable income after the application of the High Earner’s Restriction.

 Following Finance Act 2007, a jointly assessed married couple or civil partnership will be treated as two separate individuals in determining if the restriction applies.

 A single Form RR1 should be completed providing details of the application of the restriction to each spouse or civil partner where relevant.

 Property Relief Surcharge (S.531AAE TCA 1997)

 Finance Action 2012 introduced the 5% Property Relief Surcharge which applies where the individual’s aggregate income (i.e. gross income for Universal Social Charge purposes) is €100,000 pre annum or more and where certain property based incentive reliefs have been claimed in that tax year.

 By property reliefs, we mean Section 23 type reliefs, property based capital allowances, etc.

 The 5% Property Relief Surcharge is collected as additional Universal Social Charge.

 There is an exception to this rule in the case of owner occupiers for residential properties.

 Revenue’s view is that the surcharge does not take into consideration any restriction imposed by the High Earner’s Restriction.  In other words, the surcharge applies to the specific property reliefs which would have been available in calculating the taxable income of the individual had the restriction been ignored.

Example

 Mr A’s income for 2013 was as follows:

 Case V – Rental Income                                 €250,000

 He also has Section 23 Type Relief                €300,000

 The Property Relief Surcharge will be 5% of €250,000 being €12,500

 The surcharge is computed by reference to the S.23 Property Relief used in calculating Mr A’s taxable income before applying the High Earner’s Restriction.

 Conclusion

 This is an area currently under scrutiny by the Revenue Commissioners.  If this is something that affects you, it might be worth reviewing the information contained in the previous tax returns you’ve submitted as well as double checking that your 2013Tax Return, which must be filed by 31^st October 2014, is accurate and correct in line with Finance Act amendments.

The European Court of Justice held that the supply of services by a non-EU Head Office to a branch situated in the E.U. is now liable to VAT where that branch is part of a VAT group.

VAT grouping allows EU member states to treat two or more companies as a single entity for VAT purposes which means transactions between members of a VAT group are normally ignored for VAT purposes.

However, the ruling on this dispute between Skandia America Corporation and the Swedish Tax Authorities means that services previously deemed to be VAT exempt will now be subject to VAT rates of between 15% and 27%.

This decision is of particular relevance to the financial services industry since the products and services they sell (e.g. mortgages and insurance) are largely exempt from VAT.  The ruling means they will now be unable to recover input VAT refunds within the EU resulting in additional costs for banks and/or insurers who have outsourced IT and other services.

The Background: 

• The non-EU head office purchased IT services from a third party and made those services available to its branch which was situated in an EU member state i.e. Sweden.

• The US head office charged the cost of those services to its Swedish branch with a 5% mark up.

• The Swedish branch then provided those IT services to users both within and outside the VAT group.

• The costs charged by the US Head Office to the Swedish Fixed Establishment were disregarded for VAT purposes.

• The Swedish Tax Authorities didn’t hold this view.  Instead they believed the supplies between the US head office and the Swedish branch were liable to Swedish VAT.

• The Swedish Tax Authorities registered the US Head Office as a non established taxable person and raised an assessment for output tax on the supply of services to its Swedish branch.

• Skandia America Corporation appealed this assessment.

• The Swedish Tax Authorities defended its position stating that the branch was part of a VAT group and therefore a separate taxable person for VAT purposes.

• Skandia America Corporation relied on the FCE Bank Principles Case stating that a head office and its branch are part of the same legal entity and therefore no VAT can be due on the recharge.

• The Advocate General concluded that a branch could not be considered a VAT Group member independent of its head office because a branch is not deemed to be a taxable person distinct from the head office.

• On 17^th September 2014, however, the ECJ held that VAT must be charged on services provided by companies by their overseas offices.

The Consequences: 

The consequences of this ruling will be substantially higher tax bills for financial services companies especially in the U.K. which is considered the “Global Financial Services Centre.”

Special Assignee Relief Programme

 The Special Assignee Relief Programme or S.A.R.P. applies to secondments in Ireland in 2012, 2013 and 2014 and lasts for five calendar years for each employee.

How does an employee qualify for this relief?

 To qualify, the employee:

• Must work full time with the seconding employer (i.e. the U.S. employer) before the secondment for at least twelve months prior to moving to Ireland.
• Must not be Irish resident in the five years prior to the secondment.
• Must be resident in Ireland in the year of the claim.
• Must perform substantially all their duties of employment in Ireland.
• Must earn more than €75,000 per annum excluding benefits.

What Incentive is available?

 The incentive available is a reduction of taxable income in Ireland by 30% of the “specified amount.”

 The “specified amount” is calculated as an amount of 30% of the difference between €75,000 (being the lower limit) and the lower of either:

1. €500,000 (being the upper limit) or
2. All the income from the employment including Benefit-in-Kind, bonuses, share based remuneration, etc.

What are the actual savings to the U.S. Secondee? 

• Typically there will be a saving at the top Irish tax rate of 41%
• This is usually operated through the payroll system in Ireland so that PAYE is not operated on the incentive amount.

 Are there any other incentives?

 Qualifying employees can also receive the following payments tax free:

1. The cost of one return trip home for the family per year and
2. Reimbursement of school fees up to €5,000 for each child attending an Irish school.

What about restrictions?

 The S.A.R.P. Relief does not apply to:

1. New employees of the seconding employer
2. Income that remains liable for U.S. tax and where a foreign tax credit is available.

Notes: 

• This relief doesn’t just apply to U.S. employers, it applies to employers who have been resident in a country with which Ireland has a Double Taxation Agreement or an Agreement relating to the Exchange of Taxation Information.
• This relief will also apply to employees who are deemed to be Irish nationals.

Split Year Residence Relief

 This relief applies to an individual who has not been Irish resident in the tax year prior to the date of arrival and who arrives in Ireland with the intention that he/she will be resident her in the following year.  In such circumstances the individual will be treated as Irish resident only from the date of arrival.

Why is this important?

 This is important because it means the individual won’t be liable to Irish income tax in respect of any foreign income arising to him/her prior to the date of arrival.

Does it apply to all income?

 No.  It only applies to employment income except for Directors’ salaries.

 It does not affect any potential tax liability in respect of income from other sources.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

On 2^nd September 2013, Vodafone Group Plc. announced that it was disposing of its 45% interest in Verizon Wireless to Verizon Communications Inc.

At the same time, it also announced its intention to carry out a “Return of Value” to its shareholders, of which there are almost 400,000 in Ireland.  Many of these shareholders had acquired Vodafone shares in exchange for their Eircom shares in 2001.  The “Return of Value” would be partly in cash and partly in Verizon consideration shares.

On 14^th May 2014 the Irish Revenue Authorities issued a comprehensive Tax Briefing outlining the tax treatment of the Vodafone Return of Value to its shareholders which provides comprehensive guidance on the calculation of the base cost for Capital Gains Tax purposes.

 In what form will Vodafone return this value to the shareholders?

 Either by the issue of:

1. B Shares (The Capital Option) or
2. C Shares (The Income Option)

 What does that mean to the shareholder?

1. If the shareholder opts for B Shares or the Capital Option then the return of value will be liable under the Capital Gains Tax rules.  The C.G.T. rate is currently 33%.
2. If the shareholder opts for the C Shares or the Income Option then the return of value will be subject to the Irish Income Tax rules.  In other words the shareholder will be treated as having received a dividend and will be taxed as with previous Vodafone dividends.

What does the Shareholder actually get?

1. 6 new Vodafone Ordinary shares for every 11 Vodafone ordinary shares held.
2. 0.0263001 Verizon Shares for every Vodafone share
3. A cash amount of €0.3585437 for every Vodafone share

 What about the shareholders who exchanged their Eircom shares for Vodafone Shares in 2001?

 These shareholders will NOT have a Capital Gains Tax liability.

Instead they will have a capital loss to offset against other chargeable gains arising in the current tax year or if unused they can be carried forward against future capital gains.

No Capital Gains Tax charge will arise for these shareholders in the following situations:

1. Where the shareholder opted for the capital option and the sale of Verizon shares.
2. Where the shareholder opted for the capital option and held onto the Verizon shares.

What is the base cost of the Vodafone Ordinary Shares?

The base cost for those Vodafone shares acquired in exchange for Eircom shares in 2001 is €4.46 per share.

Where in legislation are the apportioning rules?

 Section 584(6) Taxes Consolidated Acts 1997 outlines the rule for calculating the apportionment of the original holding between the three elements of the new holding i.e. the cash element, the new Vodafone ordinary shares and the Verizon shares.

What about future disposals of these shares?

• €4.58 will be the base cost per share of the new Vodafone ordinary shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)
• €53.85 will be the base cost per share of the Verizon shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)

What is the Income Tax treatment for those opting for C Shares?

Individuals who opted for the C Shares have received a dividend from Vodafone which consisted of two elements:

1. A cash amount and
2. Shares in Verizon

The shareholder should include both amounts in his/her Income Tax Return i.e. the cash actually received and the market value of the Verizon Consideration Share Entitlement received.  He/she must then pay the Income Tax arising on this dividend.

How is the tax on these dividends paid?

• Employees or individuals who pay tax through the PAYE system and where their non-PAYE income does not exceed €3,174 can have any tax arising on these dividends collected and offset against their tax credits.
• Self employed individuals must file a Form 11 in which income from all sources must be included and correct taxes paid on or before the self assessment deadline.
• Employees or individuals who pay tax through the PAYE system and where their non-PAYE exceeds €3,174 must complete a Form 11 and include the amount of Vodafone income received.  They must comply with the pay and file requirements of the self assessment system.
  

Are there any exemptions?

Individuals aged 65 years and over are entitled to claim an exemption from Income Tax if their total income i.e. income combined from all sources including Vodafone and Verizon dividends is

• Less than €18,000 in the case of a single person, widowed individual or surviving civil partner or
• Less than €36,000 in the case of a married couple or civil partnership.

Will there be Dividend Withholding Tax on the Verizon Shares?

Dividends paid to shareholders of Verizon shares will, in general, be subject to US withholding tax, currently 30% of the gross dividend amount.

Irish resident shareholders can make a claim to the US Tax Authorities to be entitled to dividend withholding tax at the reduced rate of 15%.

This claim can be made by completing a Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and forwarding it to Computershare as stated on the form.

The Irish resident shareholder will be entitled to a credit for tax withheld against Income tax or Corporation tax on the dividends received.

 The credit will be the lower of:

1. The Irish effective tax rate on the dividends or
2. The rate provided by the U.S./Ireland Double Taxation Treaty

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

PART I

For many businesses moving to Ireland, especially I.T. companies, a considerable amount of research and planning into our tax regime is usually carried out in advance.  From experience, however, the question these companies rarely ask themselves is “what are the key VAT issues affecting our company if we locate to Ireland?

The current Irish VAT rules are as follows:

• The place of supply for businesses established in the E.U. who provide electronically supplied services to private consumers within the E.U. is the E.U. member state in which the supplier is established.  For example, if an I.T. company established in Ireland supplies digital materials via the market to a private consumer living in France, the place of supply will be Ireland and the Irish business will be liable to charge and account for VAT @ 23%.

• The general rule for B2B transactions is that the place of supply of an electronically supplied service is the E.U. member state in which the business customer is established.  In this situation the customer must account for VAT under the “Reverse Charge Rule.”

• For B2B transactions where the supply of electronically supplied services is made to a Business Customer outside the E.U. there are no VAT implications.

• For businesses established in the E.U. to a non-taxable consumer outside the E.U., the place of supply of electronically supplied services is where that person usually resides or has a permanent address.

• For businesses established outside the E.U. to a private, non-taxable consumer within the E.U., the place of supply of electronically supplied services is where the consumer normally resides.  For example, if a U.S. based business supplies software material via the market to an Irish consumer, then the place of supply will be in Ireland.

What does that mean to the Supplier or I.T. Business/Company?

The supplier of these services will be obliged to register and account for VAT in every E.U. member state in which they have private, non-taxable customers.  There is, however, a “Special Scheme” where non E.U. businesses need only register in one E.U. state.

PART II

When we talk about “electronically supplied services” we mean:

• Website supply, web hosting, distance programme and equipment maintenance.
• Software supply and upgrades.
• Supply of distance teaching.
• Supply of film, games and music.
• Supply of artistic, cultural, political, scientific and sporting as well as entertainment broadcasts and events.
• Supply of images, text and information and making databases available.

There is a more detailed definition of “electronically supplied services” in Article 7 of Council Implementing Regulation of 15^th March 2011 (282/2011/EU).

If a U.S. software company supplies software upgrades to private clients in twenty eight E.U. member states, does that company have to register in every one of those states?

The “Special Scheme” is optional and enables a non E.U. supplier making supplies of electronically supplied services to private, non-taxable individuals within the E.U. choose one E.U. state in which to register and pay VAT in respect of the supplies it makes within and throughout the E.U.

For example, a U.S. business/company supplies web hosting services to private consumers in Ireland, the UK and Germany.  The U.S. business can opt to register for the “Special Scheme” in Ireland which means:

• it charges Irish VAT to its Irish customers.
• it charges UK VAT to its UK customers and
• it charges German VAT to its German customers
• it registers in Ireland using ROS (Revenue Online System).
• it prepares and files a single quarterly VAT Return and pays all the relevant VAT to the Irish VAT authorities.
• The Irish VAT Revenue then distributes the UK VAT to the UK Revenue Authorities and the German VAT to the German Tax Authorities.

The U.S. I.T. business/company is eligible to use this scheme if it is not established in the E.U. and if it is not registered or required to be registered for VAT in any other E.U. member state.

Part III

From 1 January 2015, supplies of telecommunications, broadcasting and electronically supplied services made by EU suppliers to private, non-taxable individuals and non-business customers will be liable to VAT in the customer’s Member State.

The current place of supply/taxation is where the supplier is located, but from 1st January 2015 this will move to the place of consumption or the place where the consumer normally resides or is established.

Suppliers of such services will need to determine where their customers are established or where they usually reside.  They will need to account for VAT at the rate applicable in that Member State.  This is a requirement regardless of the E.U. state in which the Supplier is established or is VAT registered.

As a result of these changes, suppliers may need to register for VAT in every EU Member States in which they have customers. As there are no minimum thresholds for VAT registration, making supplies to a single customer in one Member State will necessitate VAT registration in that country.

With effect from 1^st January 2015, the Mini One Stop Shop (MOSS) will be introduced which means that instead of having to register in each E.U. member state, the supplier will have the option of declaring and paying the VAT due for all the member states in the E.U. state where the business is established via a single electronic declaration which can be filed with the tax authority in the state where the supplier is established.

The MOSS scheme will be similar to the “Special Scheme” which is currently in place for non E.U. suppliers. It will allow for VAT on Business to Consumer supplies made in all or any of the twenty eight E.U. Member States to be reported in one electronic return.

Part IV

What needs to be considered prior to the introduction of the MOSS Scheme on 1^st January 2015 by businesses already established in Ireland or thinking about establishing in Ireland?

• It is essential to examine your contract to establish who exactly is paying you and if your customer is a taxable or non taxable person.  This is particularly important in the context of undisclosed agents / commissionaire structures, etc.

• You must determine where your B2C customers are located.  Your business may require additional contractual provisions and amendments to your systems to include this information.

• It is important to examine the impact of the different VAT rates in each E.U. member state on your margins.  This may require revising your pricing structure.

• What are the invoicing rules in other member states?

• What about compliance issues in individual E.U. member states?

• Are there any occasions in which you need to register in an individual member state?

PART V

One of the biggest problems envisaged with the MOSS systems is identifying the location of the customer.

It is essential for suppliers to correctly identify the customer’s location/permanent address/usual residence so they can charge the correct VAT rate applicable in that member state.

For most telecommunication, broadcasting and electronically supplied services, it will be obvious where the customer resides. The decision about the place of supply of those services should be supported by two pieces of non-contradictory evidence including credit card details and a billing address for example.

It is anticipated that there will be situations where the consumer’s location is less obvious.  As a result, the following rules have been compiled between the Member States to help businesses ascertain the place of supply in B2C TBE transactions.

According to the Irish Revenue website:

• ^{“If the service is provided at a telephone box, a telephone kiosk, a Wi-Fi hot spot, an internet café, a restaurant or a hotel lobby, the consumer location will be the place where the services are provided. Note: this rule applies to the initial service only (i.e. the connection to the telecom or internet service) and not to any over-the-top services delivered using the connection (e.g. downloading of games onto a laptop at a Wi-Fi hotspot);}
•  ^{If the service is supplied on board transport travelling between different countries in the EU (for example, by boat or train), the consumer location will be the country of departure for the journey;}
•  ^{If the service is supplied through an individual customer’s telephone landline, the consumer location will be the place where the landline is located;}
•  ^{If the service is supplied through a mobile phone, the consumer location will be identified by the country code of the SIM card;}
•  ^{If a broadcasting service is supplied through a decoder without the use of a fixed land line, the consumer location will be where the decoder is located or the postal address where the viewing card is sent.”}

In situations where the consumer advises you that he/she resides in a different location than previously thought, the supplier can change the place of supply but only if the consumer can produce three pieces of non-contradictory evidence to support that change of place of supply.

The evidence to be used in deciding the place of supply may vary depending on the industry but the most usual types of proof include the customer’s billing address, the address on his/her bank accounts, the IP address, etc.

Over the years I’ve been asked many times how court settlements should be taxed.  I’m still surprised by the number of people who are under the impression that a special tax for compensation and damages exists – it doesn’t.

In order to determine the correct tax treatment of damages and compensation it is essential to establish what the payment relates to.

There are several possibilities, the main ones being:

1. Personal Injury
2. Compensation for Revenue Loss
3. Compensation for Capital Loss

 1. Personal Injury Compensation

A total exemption from Income Tax and Capital Gains Tax may be available in the case of personal injury compensation payments and income arising from investments of such compensation payments provided the following conditions, as outlined in Revenue’s IT 13, are satisfied:

1. The compensation must be for personal injury.
2. It must have been received arising from the institution of a civil action for damages in the court (where such an action is initiated but settled out of court, the compensation will still qualify) or pursuant to the issue of an order to pay under Section 38 of the Personal Injuries Assessment Board Act 2003.
3. Payments awarded by the Criminal Injuries Compensation Tribunal also qualify.
4. The person receiving the compensation, must, as a result of the injury, be permanently and totally incapacitated, either physically or mentally, from maintaining himself/herself.
5. The income obtained from the investment of the compensation must be the individual’s sole/main income.

2. Compensation for Revenue Loss

If the compensation is for loss of earnings then the payment will be liable to Income Tax in the case of individuals and partnerships and Corporation Tax for companies.

Examples of compensation liable to Income Tax are as follows:

1. Compensation under an insurance policy for the destruction of trading stock, accidents to members of staff or loss of profits.
2. Losses arising as a result of a breach of contract, etc.

 3. Compensation for Capital Losses

The main examples under this heading are as follows:

1. Compensation for damage or loss of an asset including land, buildings, plant, machinery, etc.
2. Insurance payments as a result of loss, damage, depreciation or destruction of an asset.
3. Compensation for the surrender or forfeiture of rights.
4. Compensation for the exploitation or use of an asset.

These capital sums will be liable to Capital Gains Tax and treated as if there was a disposal of the asset.

INTERESTING STORY

I recently came across this situation:

• An individual aged in his sixties received a considerable payment through the Irish courts.

• It was held to be compensation as a result of a satisfactory settlement of a case for breach of a joint venture agreement.

• The settlement was deemed to be compensation of a capital nature and therefore liable to taxation under the Capital Gains Tax legislation.

• The reason it was to be taxed in this manner was because the payment represented damages for breaching a joint venture agreement which related to the entire structure of the company’s profit making apparatus as in Van den Berghs Ltd. v Clark (1935) 19 TC 390.

• The individual had been a director of a family company with a shareholding of 30% who retired from the company some years earlier and had disposed of his full shareholding to the other directors.

• When he sold his shares, the entire proceeds were exempt from Capital Gains Tax under Section 598 of the Taxes Consolidation Act 1997.

• The reason he was exempt from Capital Gains Tax on the proceeds of the sale of his shares was because he qualified for “Retirement Relief.”

• To be eligible for Retirement Relief the following conditions must be met: (a) The individual must be over 55 years, (b) He/She must have been a Director for at least ten years prior to the date of the disposal, (c) He/she must have been a full time working Director for at least five of those last ten years years, (d) He/She  must have held “qualifying” shares (i.e. he/she must have owned shares in the company for more than ten years, (e) it must have been a family company (the individual must have held at least 25% of the voting rights or at least 10% of the voting rights with not less than 75% being controlled by family members), (f) it must have been a trading, farming or holding company of a trading group and (g) the proceeds relating to the qualifying assets must not have exceeded €750,000.

• The compensation payment received by the individual was also deemed to qualify for Retirement Relief under Section 598.

• Why?

• At the time the individual disposed of his 30% shareholding to the other directors of the family company, the price he received was well below market value.

• The individual accepted this consideration, which was well below the threshold amount of €750,000, on the written agreement that if the company was successful in their claim for damages for breach of a joint venture agreement, that he would receive 30% of the compensation.

• It held that the individual’s 30% share of the compensation awarded was eligible for Retirement Relief (since he met all the conditions of Section 598 TCA 1997) as it related to the disposal of “qualifying assets,” being his 30% shareholding, some years earlier.

Recently I’ve received a number of queries relating to the Irish tax treatment of CFDs or Contracts for Difference.  Although the information available is plentiful and appears to be straight forward, it’s important to be aware that each situation is different and as a result the tax treatment may vary considerably.

Firstly, what is a Contract for Difference?

Essentially it’s a contract between two parties i.e. the investor and the CFD Provider. At the close of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including individual equities, currencies, commodities, market indices, market sectors, etc.  In other words, two parties take opposing positions on the difference between the opening and closing value of a contract i.e. the price will rise versus the price will fall.

Contracts for Difference offer wide access to different financial instruments from a single account for a fraction of the cost of buying shares.  They do not carry voting rights like ordinary stock and CFD trades on certain Irish stocks are not liable to Stamp Duty.

CFDs can be traded ‘long’ or ‘short’ to speculate on rising or falling markets i.e. the investor speculates that an asset price will rise by buying (long position) or fall by selling (short position).

CFDs do not confer ownership of the investment.  Instead the investor has access to the price performance which includes any dividend or corporate action equivalent.

What is the Irish tax treatment for profits / gains?

Contracts for Difference are treated as Capital Assets liable to Capital Gains Tax UNLESS they are deemed to be held in the course of a financial trade in which case the profits are liable to Income Tax under Case I, Schedule D.

According to Revenue eBrief No. 36/2007:

“The contracts require two parties to take opposing positions on the future value of a particular asset or index. Investments are often made on a margin of 20% of the contract amount. As well as the difference in value of the asset from beginning to end of the contract period, certain other notional income flows are taken into account in calculating the overall gain or loss.

• The first of these is notional interest, calculated on the non-margined value of the underlying asset for the contract duration.
• The second is the notional income which would have been earned by the asset during the contract period.

Where the contract is long (expectation of a rise in price), notional interest is a deduction and notional income a credit in the calculation.

Where the contract is short (expectation of a fall in price), notional interest is a credit and notional income a deduction.

The chargeable gain will be calculated on the gain or loss resulting from the computations above and including a deduction for all necessary broker fees incurred in the full contract.

Actual interest paid, if any, on the margin amount put up will be chargeable under Case III  in the ordinary way and does not come into the CGT calculation.”

What’s the difference between holding Capital Assets and operating a financial trade?

The concept of a “trade” is a matter of interpretation and is usually determined by a number of factors known as “badges of trade.”

For example, a once off transaction would not normally be considered a “trade.”  Depending on the circumstances and the timing it may be liable to Capital Gains Tax or indeed may be exempt from tax.  If, on the other hand, the investor was involved in a large number of transactions throughout the year of assessment then this activity would be most likely be considered to be a trade and therefore liable to Income Tax.

What are the “Badges of Trade”?

There are a number of factors which will determine the existence of a “trade”. There is, however, no decisive test and no legislative definition.  There is considerable case law concerning this issue and in 1954 a Royal Commission was set up in the United Kingdom to consider what factors should be taken into account in deciding whether a trade exists.  A report was published outlining the “Badges of Trade” which are as follows:

1.      THE SUBJECT MATTER OF THE SALE.

While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally, the subjects of investment.

Again, property, which does not yield to its owner an income, or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does

2.      THE LENGTH OF PERIOD OF OWNERSHIP.

Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule;

3.      THE FREQUENCY OF SIMILAR TRANSACTION.

If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been dealing in respect of each;

4.      SUPPLEMENTARY WORK.

If the property is worked on in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. When there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way;

5.      THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REALISATION.

There may be some explanation, such as a sudden emergency or opportunity calling for ready money that negates the idea that any plan of dealing prompted the original purchase;

6.      MOTIVE.

There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases and can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions.

In Summary

1. If goods or services are provided regularly with a commercial motive this will generally indicate the existence of a trade.
2. The length of ownership of the asset can be relevant but not conclusive in determining the existence of a trade.
3. The frequency and number of similar transactions by the same person should also be considered.
4. Making the items more marketable or improving them is generally considered to be an indication of a trade.
5. The intention of making a profit makes the transaction or transactions more likely to be a trade.
6. The nature of the asset may not be relevant in deciding whether or not trade is involved. The purchase/sale of land and/or shares can often be viewed as trading activities once the above factors have been taken into account.

Say an individual is employed in an investments role by day and makes considerable CFD profits in his/her spare time based on a significant number of transactions, how would this income be taxed?

Although opinions published by Revenue in the context of financial services are primarily concerned with group financing and treasury operations I believe they have direct relevance to this situation and should certainly be taken into consideration in ruling in favour of Income Tax Treatment.

In one such case, Revenue believed that the company was trading on the basis that the company was actively managing the business and making strategic decisions regarding financing and treasury operations. Despite the fact that the activities of the company were outsourced (i.e. no individuals were employed in the company), the outsourcing arrangement was managed and controlled by Irish resident directors with the appropriate level of specialized expertise in this area.

In this example, as the individual’s Irish PAYE employment relates to the area of financial services/investments, it would be difficult to see how Revenue could treat his/her C.F.D. activities as anything other than trading activities liable to Income Tax.

In summary, as the C.F.D. relates to a large number of transactions with a profit motive which requires a considerable amount of skill and expertise, it would be highly probable that this income would be liable to Income Tax and not Capital Gains Tax.

IN CONCLUSION

1. Capital Gains Tax will arise on CFD Gains.
2. Capital Gains Tax will arise on the difference between opening and closing values of an asset.
3. Income Tax will arise on deposit interest earned on margin.
4. The margin is the initial equity investment which is usually up to 20% to show the investor can complete the contract on closing.  If there are significantly negative market variations then additional capital will be required by investors so as to avoid forfeiting or losing the full margin deposit.
5. The ‘non-margin’ is defined as the balance which is leveraged or borrowed to purchase the position at the outset of the CFD.
6. Income Tax will arise on the accounting profits if the CFDs are held in the course of a trade.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.