The key measures impacting corporates in Finance Bill 2022 are as follows:
- Amendments to the R&D tax credit.
- Technical amendments to the ILR.
- The extension of the KDB.
- The extension of the film tax credit (subject to a commencement order).
- Technical amendments to the digital gaming credit legislation.
- New definition of “relevant monetary item” relating to the tax treatment of foreign exchange gains/losses of trading companies.
- Legislative changes with respect to the treatment of capital sums received from the sale of patents and patent rights.
- Updating the definition of “Transfer Pricing Guidelines”.
- Mandatory Exchange of Information for Digital Platform Operators and return of certain information by Reporting Platform Operators (DAC7).
- Updating the list of non-cooperative jurisdictions for tax purposes to reflect new EU lists.
- Changes to Ireland’s double tax treaty network.
- Miscellaneous legislative updates.
R&D tax credit
Finance Bill 2022 has introduced a number of changes in relation to the R&D tax credit and, in particular, the tax payable portion. These changes have been made in light of US foreign tax credit reform and the ongoing work to implement Pillar Two. Please refer to our R&D insight for further analysis.
Interest Limitation Rules
Following on from the introduction of ILR in the prior year’s Finance Act, the changes in this year’s Finance Bill seek to ensure that the ILR and associated preliminary tax rules operate as intended.
This includes a clarification of the operation of the exemption for interest on legacy debt, to specify that a “first-in-first-out” basis applies where there is a repayment in respect of facilities that have a mixture of legacy debt and non-legacy debt (i.e. where a partial repayment is made on a mixture of legacy and non-legacy debt, that repayment shall be treated as a repayment on legacy debt in priority to non-legacy debt).
Other technical changes to the ILR legislation include broadening the existing definitions for a “consolidating entity” and “interest equivalent”, and amendments to how the ILR legislation interacts with interest provided under Section 291A (capital allowances on qualifying intangible assets). In addition, the “Group EBITDA” and “group exceeding borrowing costs” definitions have been expanded to reflect the possibility that a taxpayer could form its own worldwide group or form part of a worldwide group.
Of note, the definition of “large scale asset” has been expanded to include a large-scale residential development within the meaning of the Planning and Development Act 2000, approved by a planning authority under section 34 or section 170 of that Act. Please refer to our property insight for further analysis.
Preliminary tax rules are to be amended to cater for the effects of disallowable amounts in certain instances.
Knowledge Development Box
There have been changes to the KDB in Finance Bill 2022. Firstly, the KDB was due to expire at the end of 2022, but section 33 of the Bill provides that the KDB will be extended for a further four years, such that it can be claimed for accounting periods beginning before 1 January 2027.
Secondly, the Bill reduces the benefit of the KDB by increasing the effective tax rate on KDB profits to 10% rather than the current 6.25%. This amendment is to prevent KDB profits from being adversely impacted when the Pillar Two Subject to Tax Rule (STTR) is introduced.
These changes are subject to a commencement order to be issued by the Minister for Finance and will apply by reference to the STTR implementation.
Film Relief (section 481, TCA 1997)
Finance Bill 2022 has provided for an extension of the relief provided under section 481 by a further four years until 31 December 2028. This is a welcome amendment to the legislation and should provide some much-needed certainty to those operating in the audiovisual industry with long production cycles. This amendment will commence at a future date as it is subject to EU State Aid approval.
Digital Gaming Credit (section 481A, TCA 1997)
The digital gaming credit was introduced last year but as the credit required EU State Aid approval, it was subject to a commencement order. Finance Bill 2022 has included a number of amendments to section 481A to ensure compliance with State Aid requirements and to make minor technical corrections. Section 481A remains subject to a commencement order before it will come into effect.
Section 79 of TCA 1997 provides that foreign exchange movements on “relevant monetary items” are, for corporation tax purposes, to be treated as part of profits or losses of a company’s trade rather than treated as capital gains or capital losses. Section 31 of Finance Bill 2022 proposes an amendment to section 79 that is said in the Explanatory Memorandum to the Bill to be an expansion of the definition of “relevant monetary item” to include both trade debtors and trading bank accounts with the aim of allowing foreign exchange gains or losses in respect of those items to be treated as part of trade profits or losses. Such items are often potentially capable of being so treated under first principles and under certain interpretations of the existing version of section 79. As such, the proposed amendment could be viewed as a clarification measure. While the amendment is welcome, if the measure is to put the treatment of trade-related bank accounts beyond doubt and to achieve the aim as stated in the Explanatory Memorandum, then committee or report stage amendments are likely to be necessary to address some potential shortcomings in its scope as currently drafted.
Sale of patent rights (Section 757 TCA 1997)
Finance Bill 2022 includes welcome technical amendments with respect to the treatment of capital sums received for the sale of patent rights. The amendments provide relief for intra-group transfers of patent rights in a similar manner to the relief available to intra-group transfers of patents.
Finance Bill 2022 also includes a technical amendment, which confirms that the outright sale of a patent or a patent pending is not a sale of patent rights and, as a result, should be subject to Capital Gains Tax at 33%. The sale of patent rights for a capital sum is subject to corporation tax at 25%.
For chargeable periods commencing on or after 1 January 2023, the definition of “Transfer Pricing Guidelines” has been updated such that Irish Transfer Pricing rules should be construed in accordance with the 2022 version (as opposed to the 2017 version) of the OECD Transfer Pricing Guidelines.
DAC7—Mandatory Exchange of Information for Digital Platform Operators and return of certain information by Reporting Platform Operators
Finance Act 2021 introduced rules to provide for the transposition of new EU tax transparency rules for digital platform operators (DAC7) into Irish law. These rules aim to provide EU Member States’ tax authorities with the information necessary to ensure the enforcement of tax rules regarding commercial activities performed with the intermediation of digital platforms. They also aim to introduce standardised reporting requirements that should reduce the administrative burdens on digital platform operators. Finance Bill 2022 repeals and replaces these rules to ensure that domestic legislation effectively transposes DAC7 into Irish law.
Under the revised rules, when enquiring into transactions for DAC7 purposes, the Revenue Commissioners shall have access to data collected for anti-money laundering and terrorist financing reasons.
During 2022, the OECD published ‘Model Rules for Reporting by Digital Platform Operators’. Finance Bill 2022 legislates for the transposition of these rules into Irish law. These rules provide for the introduction of reporting obligations for digital platform operations and shall come into operation at such date as the Minister for Finance appoints. However, under DAC7, the rules come into effect on 1 January 2023 with the first reporting obligation due on or before January 2024.
Non-cooperative countries for tax purposes
Section 36 of the Finance Bill amends section 835YA to account for the changes to the EU list of non-cooperative countries for tax purposes. Since Finance Act 2021 was signed, the EU Council has twice updated the list of non-cooperative countries (generally referred to as ‘blacklist’ or ‘greylist’ countries), first in February 2022 and more recently on 12 October 2022. Section 36 ensures that companies should refer to the appropriate list for their particular accounting period.
Policy/ International outlook
As outlined in the Minister’s Budget 2023 statement, international tax reform continues to shape domestic tax policy-making in Ireland. The Minister signalled that options for the introduction of a territorial exemption would be seriously considered in conjunction with the ongoing work to implement Pillar Two. This is particularly relevant to domestic and international large corporations.
Finance Bill 2022 updates the list of Ireland’s double tax treaties for new protocols with the Isle of Man and Guernsey.
Finance Bill 2022 sets out an amendment that includes the National Standards Authority of Ireland (NSAI) within the list of specified non-commercial state-sponsored bodies exempt from certain tax provisions. As a result of this amendment, the NSAI is being made exempt from tax on certain income and gains.
In addition, Schedule 26A has been updated to reflect the Higher Education Authority Act of 2022 and its meaning of a designated higher education institution, and to add the Royal Irish Academy. These changes to Schedule 26A are subject to a Ministerial Commencement Order.
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Finance Bill 2022 contains many important changes that will have implications for companies. We are available to assist you with any queries you have. Contact us today.