With its corporate tax rate down to 12.5% Ireland cannot afford to let any potential revenue slip through the net and its 2003 Finance Bill announced last week attempts to remove the risk of this happening.
The Bill, announced on February 6, consisted largely of measures announced in December's budget with a few additional relief measures thrown in, but what came as a surprise was the number of tax avoidance measures included.
In addition to two anti-avoidance measures announced in the budget, and one released in January, finance minister Charlie McCreevy introduced a further nine measures designed to combat avoidance. One of the more significant anti-avoidance measures affects interest relief for companies and removes the previously unrestricted relief given to companies for interest on loans used to purchase an interest in another company. The amended legislation will restrict that relief if there is a recovery of capital by the investing company from the company invested in. Another measure counters abuse involving the interest charge accrued but not paid on loans between connected companies.
As with the remaining anti-avoidance measures, which affect relief including mortgage interest, balancing charges for capital allowances, and the sale of rental income from buildings, the above measures will now be discussed and may be changed before the Finance Bill is formally enacted in April this year.
Enda Faughnan, the head of tax at PricewaterhouseCoopers, Ireland, believes that the restriction on interest relief is one measure that will be changed.
"I think it's gone too far," said Faughnan. "I doubt the government understand fully what it's done. It doesn't just cover the borrower but any connected company of the borrower recovering capital so any offshore activity could be viewed as recovery of capital and the company would cease to qualify for interest relief on borrowings."
Securitization facilities in Ireland will also be improved as McCreedy announced that the system will be modernized to allow for modern, synthetic securitizations where the new securities based on underlying assets are created and sold rather than the assets themselves being sold. This amendment will expand the range of assets that can be acquired and had been sought by the industry for several years. While not formally announced until the finance bill, practitioners were aware that it would happen.
The bill also implements budget changes including amendments to capital allowances schemes, capital gains tax reforms, value-added tax (VAT) increases and the controversial PAYE and PRSI levies on benefits-in-kind which will be both costly and time consuming for employers.
Transfer pricing rules, which so far Ireland does not have, were rumoured to be introduced in this year's Bill but did not feature.
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