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www.pwc.ie/financeactPavingthe wayFinance Act 2017December 2017

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Table of contentsWelcome4Policy / International Outlook8Private Business / Individuals10Domestic and International Large Corporates14Companies Act / Accounting Related Changes18Agri Sector20Property22Stamp Duty24Employment Taxes /Individual Taxes28Financial Services30VAT32Sugar Tax and other Measures34Tax Administration & Revenue Powers363

WelcomeFiona Carney 353 1 792 6095fiona.carney@ie.pwc.comOn 19 October 2017, the Irish Governmentpublished Finance Bill 2017, the initial step inlegislating for the measures announced lastweek by the Minister for Finance PaschalDonohue in the 2018 Budget. While the Billis relatively short at 96 pages, it contains, inaddition to the taxation measuresannounced in the Budget Speech, a numberof provisions not previously announced.These provisions, although not entirelyunexpected, include technical amendmentsto cater for Companies Act 2014 in certaincircumstances, measures to legislate forpre-existing Revenue administrativepractices and some anti-avoidance measures.The Bill was amended in a number ofrespects prior to its enactment on 25December 2017. The amendments made arehighlighted in dark red text throughoutthe document.4Stephen Ruane 353 1 792 6692stephen.ruane@ie.pwc.comThe need for consultation has beenhighlighted by the Government on severalissues such as the proposals of the Coffeyreport and the plan to merge USC with PRSI.This acknowledgment recognises theimportant role that organisations across allsectors have in contributing to the discussionon the future direction of Ireland’stax regime.Personal Tax HighlightsIn the run-up to the Budget, all signsindicated that the Government wasintending to alleviate the income tax burdenon low to middle income earners. TheFinance Act achieves this in two ways: firstly,modest reductions in USC rates; and second,a 750 increase in the standard rate taxband, which means that the entry point tothe 40% rate of income tax will increasefrom 33,800 to 34,550. While this isPaul Wallace 353 1 792 7620paul.wallace@ie.pwc.comundoubtedly a positive move, it is still a verylow entry point in comparison tointernational standards. Although themarginal tax rate on incomes up to 70,044has fallen to 48.75% from 49%, it remains at52% for earners over 70,044, which is aconcern in terms of attracting highly skilledand senior-level individuals to Ireland.In addition, the Finance Act includesprovision for an increase of 200 and 100for the earned income tax credit and thehome carer income tax credit, respectively.The increase in the earned income taxcredit represents a further step in thephased approach to achieve parity with thePAYE tax credit.As provided for in Finance Act 2016, theDIRT rate on deposits is reduced by 2% to37% in 2018, with further 2% annualreductions to come in 2019 and 2020.

Employment TaxesAn increase in the National Training FundLevy by 0.1% per annum over the nextthree years was announced, which bringsthe Levy from 0.7% to 1%. This increase isin line with a recommendation in theCassell’s report on higher educationfunding published last July. This issignificant for employers as the Levy is acomponent part of the Employer PRSIcharge. Therefore, employers are facing anincrease in their PRSI costs from 10.75% to11.05% by 2020.As part of the Government’s climatechange policy, the Finance Act introducesa 0% BIK rate to apply to electric cars for aperiod of one year. Electricity used in theworkplace for charging vehicles will alsonot be considered a BIK. Given the currentBIK rate on company cars, which generallyis 30% of the open market value of the car,this incentive will likely result in asignificant uptake in the use of electric carson Irish roads.The announcement that a working groupwill be established in relation to theamalgamation of the USC and PRSI overthe medium term is to be welcomed. Byannouncing this consultation process, theGovernment is sending a signal that it isaware that it must ensure Ireland is anattractive location for key internationaltalent and global businesses to relocatehere after Brexit.Stamp DutyThe Finance Act legislates for the muchdebated revenue-generating increase in thestamp duty rate on transfers of non-residential property from 2% to 6%, inrespect of instruments of transfer executedon or after 11 October 2017. Whiletransitional measures have been providedfor in respect of contracts entered into before11 October, the window is relatively short, inthat the conveyance/assignment of propertymust be executed before 1 January 2018 forthe 2% rate to apply.In a surprise amendment made to the Act,the stamp duty rate on shares derivingtheir value from Irish non-residentialproperty was increased to 6% in certaincircumstances. Again, transition measureshave been provided where a bindingcontract was entered into before 6December 2017 and completes before 1March 2018.The rebate scheme announced in theBudget for stamp duty paid on land whichis used to develop residential propertywithin a specified period was incorporatedinto the Act during the Committee Stage.Corporation TaxOne element of the Finance Act that willhave an immediate impact on companies isthe re-introduction of the 80% income capfor Intellectual Property (IP) capitalallowances. The provisions mean that, at aminimum, 20% of a company’s IP tradingprofits will be subject to tax each year andany excess capital allowances above thisamount will be carried forward for use infuture years. The cap, however, onlyapplies to claims made in respect of IPpurchased on or after 11th October 2017.The change arises from a recommendationin the recent Coffey Report, whichmaintained that such a measure wouldhelp support the sustainability of Irishcorporation tax receipts.Section 247/249 TCA 1997 –Interest as a chargeThe Finance Act includes a provisiondesigned to put on a legislative footing anadministrative arrangement operated byRevenue, whereby relief was granted forinterest under section 247 where theexistence of double or multiple holdingcompanies denied the availability of reliefon a strict technical basis. Changes havealso been made to s.249 TCA 1997, to alignthe recovery of capital provisions withs.247 TCA 1997.Whilst the amendments are to be broadlywelcomed, the measures are complex innature (further analysis on page 14-15).Pre-letting expensesIn an effort to address the currentshortage of houses in the rental sector,the Act provides for the introduction of anew deduction for “pre-lettingexpenses” of a revenue nature incurredon a property that has been vacant for aperiod of 12 months or more. Nodeduction is available at present for suchexpenses. Under the new provisions,relief will be available for such expensesup to the end of 2021, subject to a limitof 5,000 per property.VATThe only change in VAT rates introducedby the Act is an increase in the VAT rate onsunbed services from 13.5% to 23% witheffect from 1 January 2018.5

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Despite much speculation, the reducedVAT rate of 9% for the hospitality andrelated services sector has been retained.While the Minister recognised that priceshave risen in the sector in Dublin, heretained the reduced rate on the basis ofthe national interest.Sugar TaxThe Act provides for the introduction of atax on sugar-sweetened drinks. A tax rateof 16.26c per litre applies where the sugarcontent is 5 or more grams of sugar per100ml and 24.39c per litre for these drinkswhen they have 8 or more grams of sugarper 100ml. The levels of tax arecomparable to the rates being introducedin the UK in April 2018 and our sugar tax isexpected to be introduced at the sametime, subject to State Aid approval.Agri SectorA number or measures have beenincluded in the Finance Act impactingon the Agri Sector. These includeamendments to ensure the letting ofland for the production of solar energywill not affect entitlements to CATagricultural relief and CGT retirementrelief. Furthermore, despite the increaseon the rate of stamp duty applicable totransfers of commercial properties, thelower stamp duty rate of 1% willcontinue to apply to transfers ofagriculture property between closerelatives until 2020.Capital Gains Tax (CGT)The Act has legislated for anadministrative practice operated byRevenue in respect of capital gains taxgroup relief, a relief which provides for thedeferral of CGT where an asset istransferred within a group of companies.This amendment extends the scope of theCGT group relief provisions to includecompanies resident in countries withwhich Ireland has a double tax agreement.This amendment puts Revenue’sadministrative arrangement on a moreformal footing and brings capital gains taxgroups in line with loss groups.Companies ActThe Finance Act contains several measuresrequired in order cater for the companylaw changes introduced in Companies Act2014 (‘the Act’). These are primarilyrelated to the updating of references to theprevious Companies Acts in the legislation.In addition, a number of changes havebeen made in respect of domestic mergersand divisions.Key Employee EngagementProgrammeThe Finance Act legislates for a new shareoption scheme, the Key EmployeeEngagement Programme (“KEEP”). Thescheme is aimed at ensuring thatunquoted SMEs can attract and retain keyemployees and allows employees, whichsatisfy the necessary conditions, to defertaxation on the receipt of share optionsuntil such shares are disposed of. Theintroduction of the scheme is subject toapproval from the EU.Multilateral InstrumentThe Finance Act provides the first steptowards Ireland’s ratification of theMultilateral Instrument (“MLI”). The MLIwill provide the means by which Ireland’sdouble tax treaties will be updated, obviatingthe need for individual bilateral negotiation.While no definitive timeline has been givenas to when the ratification process isexpected to finalise, it is anticipated thatIreland would ratify the MLI in early Autumn2018, in order for the Convention to takeeffect from 1 January 2019.Accounting StandardsThe Finance Act provides for an extensionto the existing provisions on accountingtransitional adjustments to ensure that, inall cases where companies move betweenaccounting standards, the associatedtransition adjustment is covered for taxpurposes. The provisions are alsoextended to give legislative support toexisting practices regarding changes ofaccounting policy and the correction ofaccounting errors (further analysis onpage 19).Tax Administration andRevenue PowersThe Act contains a number of complianceand administrative measures, which havebeen introduced in order to ensurecompliance with both international taxtransparency standards and theforthcoming General Data ProtectionRegulation (“GDPR”).ConclusionOverall, the Finance Act containsmeasures that have the effect of paving theway for Ireland’s future while at the sametime balancing the books and supportingeconomic growth. This has been achievedthrough a combination of measures,including modest reductions in the incometax burden on individuals, the introductionof a new share option scheme and thestimulation of the Irish housing marketthrough a variety of targeted measures.The strong emphasis on consultation inrespect of several areas is to be welcomed,as it provides stakeholders with the perfectopportunity to help shape the futuredirection of Ireland’s tax policies.7

Policy / International OutlookPeter Reilly 353 1 792 6644peter.reilly@ie.pwc.comThe publication of the Finance Bill allowed policy statements made on Budgetday take their first steps towards becoming a legislative reality. When theBudget Speech, along with the accompanying documentation and now theFinance Act are taken together, they paint a picture of a first (small) step on aroad towards a more competitive income tax regime and a BEPS compliantcorporate regime. The Coffey report and current consultation should mean thatthere are few corporate tax surprises on the horizon while, from a personal taxperspective, the rate of change will likely depend on the size of the fiscal space(including the all-important hidden fiscal space) and any revenue raisingrabbits that can be pulled out of hats over the coming years (see stamp dutymeasures). The key aspect as ever though is the importance of engagement withthe Department of Finance offering ample opportunity through consultationsand their open door policy.The Finance Act allows us theopportunity to get under the hood of themeasures proposed in Budget 2018, takea look at the measures that were notmentioned by Minister Donohue andreflect more broadly on the tax policyagenda for the journey of Budgets wecurrently find ourselves on.Intellectual Property Cap &Ireland’s Commitment toCertaintyThe reintroduction of the 80% capwithin 291A has sound policyfoundations. Increased levels of IP, willlead to increased profits in Irelandwhich result in an increased GDP andultimately increased contributions tothe EU. The question therefore arises asto how this is funded and to this end thecap makes sense. It was also importantthat Ireland cemented our commitmentto certainty by not applying the cap toall IP but rather only IP purchased afterBudget Day. The three Rs (rate, regimeand reputation) are all, in their own8way, reliant on consistency and, as such,this move was symbolically important inframing our policy objectives (for atechnical analysis of the changes to291A please refer to page 14.)Stamp DutyThe increase in stamp duty was thegolden goose that gave MinisterDonohue the flexibility he needed tomeet the Budget targets. The increasealigns Ireland with international normsand the theory is that it brings in muchneeded revenue from a relativelybuoyant sector. However, the increasefrom 2% to 6% for commercial propertyand other non-residential propertyassets is budgeted to yield 372m. Thissuggests that the market will amount to 9.3bn which when compared to thecommercial property market in 2016,which amounted to 4.5bn, looks overlyoptimistic especially when considerationis given to the fact that many of the bigticket commercial properties havealready been sold.

Multilateral InstrumentA measure that was not announced onBudget Day but has appeared as expectedin Section 78 of the Finance Act was thefirst step towards Ireland’s ratification ofthe Multilateral Instrument. Given thecomplexity of ratifying such amultifaceted and substantial convention,this was always likely to be a two-stepprocess. All eyes will now be focused onwhen the ratification process is finalised.While there is no indication in the Bill andindeed no confirmation from theDepartment of Finance, the best guesswould be that Ireland would ratify in earlyAutumn 2018 in order for the conventionto take effect from 1 January 2019. TheMLI is likely to have a significant impacton gaining access to treaty benefits formany companies and, as such, planningfor the impact should start now.A Road Map for the FutureThe Coffey report has led to a clearroadmap for Ireland’s corporate tax policyjourney over the coming years. Helpfullyalong with the multitude of Budgetdocuments released in October 2017 was aconsultation on the majority ofrecommendations made by Seamus Coffey.This allows those effected the chance toprovide feedback and make suggestionsrelated to the measures which the Ministerappears committed to introducing over theshort to medium term.Five of the consultation questions relatedirectly to transfer pricing withpotentially the biggest changes comingin the form of the DEMPE functionsconcept contained in the intangibleschapter of the new transfer pricingguidelines and the suggestion to extendour transfer pricing rules to non-tradingtransactions. The former will result ingroups needing to consider the level of“substance” they have related to their IP,while the latter will result in a significantchange for the majority of groupsoperating in Ireland. Consideration ofthe impact of both needs to beconsidered in the context of otherchanges in the pipeline so that decisionscan be made in a holistic manner.The rest of the consultation, by andlarge, relates to Ireland’s implementationof the Anti-Tax Avoidance Directive(ATAD). The first, and potentially biggestmeasure to be considered from this is theimpending introduction of CFC rules (by1 January 2019). The minimum standardoutlined in the ATAD providesoptionality for Ireland and the choicesare complex. It goes without saying thatit is imperative that Ireland adopt ruleswhich satisfy the ATAD minimumstandards but also do not impinge ontrue economic business activities – assuch it is incumbent on all effected to getinvolved in the debate over the comingweeks and months.Personal TaxesThere was a small reduction in thepersonal tax burden for all workers. Themodest reduction in USC, along with therelatively small increase in the standardrate income tax band do again indicatethat the political will is there to support apolicy push towards lowering the taxburden of workers. The hope would bethat this trend can and will continue oversuccessive budgets and that the pace ofchange can increase as the status of ourpublic finances continues to improve.9

Private Business / IndividualsThe main area of interest for private businesses in Finance Act 2017 was theintroduction of the Key Employee Engagement Programme (KEEP). This is awelcome initiative aimed at SMEs who wish to grant share options to employees.This incentive will give SMEs the opportunity to offer share options to employeesin a tax efficient manner which to date have been a costly and thereforeunappealing way of rewarding employees. It is hoped that the introduction of theKEEP initiative will encourage more employers in the SME space to introduceshare options to reward, incentivise and motivate staff which in the medium tolong term should aid growth and increase levels of staff retention.John Murphy 353 1 792 6439john.x.murphy@ie.pwc.comMarie Flynn 353 1 792 6449marie.flynn@ie.pwc.comKey Employee EngagementProgramme (KEEP)KEEP is a new initiative which will apply tounquoted trading companies (i.e. none ofthe shares are quoted on a stock exchangeother than the Enterprise SecuritiesMarket (ESM) of the Irish Stock Exchange(ISE) or equivalent in the EEA/countrywith which Ireland has a Double TaxAgreement (DTA)) that are incorporated inan EEA state and Irish resident (or residentin the EEA but carry on a business inIreland through a branch or agency).Certain trading activities are specificallyexcluded e.g. financial activities, dealing inor developing of land and professionalservices companies. The company mustalso come within the definition of an SMEon the date the options are granted i.e.employ fewer than 250 people and have anannual turnover not exceeding 50million, and/or an annual balance sheettotal not exceeding 43 million.A qualifying company can grant shareoptions to employees up to a total market10value of 3m with the total market value ofthe share options granted to any oneindividual not exceeding 100k in any onetax year, 250k over three consecutiveyears or 50% of the individual’s annualemoluments. KEEP will only apply to shareoptions granted to full time employees ordirectors who spend a minimum of 30hours per week working for the company.The share options must be granted to theemployees at market value and the mainpurpose of the scheme must be to recruitor retain employees. In order to qualify forthe KEEP programme, the share optionsmust be held for a minimum of 12 monthsbefore being exercised (with limitedexceptions e.g. on death or a sale of thecompany), and must be exercised within10 years of the date of grant.The shares received on the exercise of theoptions must be ordinary shares and theymust not carry any preferential rights e.g.to dividends or assets on winding up. Inaddition, the KEEP programme will notapply if the individual (either alone or with

connected persons) can control directly orindirectly more than 15% of the ordinaryshar

fiona.carney@ie.pwc.com Stephen Ruane 353 1 792 6692 stephen.ruane@ie.pwc.com Paul Wallace 353 1 792 7620 paul.wallace@ie.pwc.com. 5 Employment Taxes . measures that have the effect of paving the way for Ireland’s future while at the same time balancing the books and supporting economic growth. This has been achieved

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