|Budget 2016 Highlights - BDO
BDO Tax Team
Oct 14, 2015
Minister Noonan yesterday delivered the final and most eagerly anticipated Budget of this government. This Budget is being presented in an environment of economic recovery with the Department of Finance forecasting economic growth in 2015 of 6.2% in 2015, and 4.3% for 2016 taking account of the measures announced today.
The forecast deficit of 2.1% of GDP is ahead of the original target of 2.7%, and the Department of Finance is forecasting that the books will be balanced, in headline terms, in 2018.
The changes in the PRSI and USC rates, and the Minister’s commitment to reduce the marginal tax rate on low and middle income earners to less than 50% will impact favourably on individual's take home pay.
The Minister also targeted incentives in some key growth sectors, including:
- farming and agri-food
- retailers – incentivising electronic payments
- reduced road tax for large goods vehicles
We welcome the confirmation that Ireland is to introduce the world’s first OECD compliant knowledge development box (“KBD”) innovation regime with a corporate tax rate of 6.25% for qualifying income. The KDB enhances Ireland’s overall offering for innovative companies which already includes the 12.5% rate of corporation tax, capital allowances on intangible assets and a refundable R&D tax credit.
The KDB will be of interest to Irish indigenous companies, a large cohort of the existing claimants of the R&D tax credit, as well as emerging small and medium sized foreign direct investment companies.
In order for the KDB to be considered best in class as other jurisdictions introduce their OECD compliant box regimes, it will need to be proactively reviewed on a regular basis and amended as and when required.
The new 20% Capital Gains Tax rate, for sales of business assets, is also welcome and will help stimulate corporate activity, producing faster growing businesses, and provide a fairer net return for business owners and entrepreneurs. We know from experience this will significantly increase the tax yield for the government. However BDO also believes the Government has missed an opportunity by not cutting the rate further. We had suggested a cut to 10%, in line with the UK rate for similar gains for entrepreneurs. By cutting the rate further, growth in the sector would have been significantly stimulated and entrepreneurship would have been further incentivised.
Ireland’s International Tax Strategy
We agree with Minister Noonan’s assessment that Ireland is well positioned for the post-BEPS world. Alignment of taxing rights with substance is a long term feature of Ireland’s 12.5% tax rate and underlying corporate tax policy.
In acknowledging that Ireland, as a small country with an open economy, must keep pace with the international movement for change on corporation tax policy, the Minister confirmed that Ireland, in conjunction with a number of other countries, will legislate for country-by-country reporting in accordance with the OECD recommendations.
BDO welcomes the announcement of country-by-country reporting as it will further substantiate the claims that the Irish tax regime is open and transparent and has nothing to fear from further transparency being introduced across the globe.
Irish headquartered multinationals with group turnover in excess of €750m in 2016 should, if not already doing so, review their reporting and compliance systems across their global group together with their underlying transfer pricing policies and documentation. A “dry run” to identify any concerns or issues with meeting the new compliance obligation is recommended sooner rather than later.
There is no change in the marginal rate of income tax which remains at 40%. The only changes in the tax credits regime is an increase in the Home Carer tax credit from €810 to €1000, and the introduction of a new “Earned Income Tax Credit” for those individuals who have earned income but do not qualify for the “PAYE” tax credit.
There are also some changes to PRSI aimed at low paid workers following the recommendations made by the Low Pay Commission.
However the main changes on the personal tax side are favourable adjustments to the bands of USC aimed at reducing the overall tax burden on low and middle income earners.
There was also confirmation of the abolition of 0.15% pension levy at the end of 2015.
Overall Budget 2016 provides some welcome news for Ireland’s business community. In particular the reductions in PRSI and USC should be positive for growth and jobs in the economy. We also welcome the 20% capital gains tax incentive rate for entrepreneurs which will stimulate activity and investment.
I hope you find our commentary on Budget 2016 insightful. If you have any questions on what the measures mean for you, or your business, please contact any member of the BDO tax team.
Ciaran Medlar Head of Tax
Corporation Tax Rate
The Corporation Tax exemption for certain “start-up” companies is extended for a further three years until the end of 2018.
Knowledge Development Box
Full details of the new “Knowledge Development Box” (“KDB”) will be announced in the Finance Bill. The key element is a reduced Corporation Tax rate of 6.25% for profits from certain patents and copyright software resulting from qualifying R&D carried out in Ireland.
Anti-avoidance - Base Erosion and Profit Shifting (BEPS)
In conjunction with the Budget the Department of Finance published an “Update on Ireland’s International Tax Strategy”
In his Budget speech the Minister stated that Ireland is well positioned for the post- BEPS world. Alignment of taxing rights with substance is a long term feature of Ireland’s 12.5% tax rate and underlying corporate tax policy.
The Minister also confirmed that the Finance Bill will provide for country by country reporting in accordance with the OECD recommendations.
Farming & Agri food Sector
There are a number of incentives for this sector.
Film Tax Credit Relief
- extension of general stock relief to the end of 2018.
- extension of stock relief for young trained farmers and registered farm partnerships to the end of 2018
- extending the Stamp Duty exemption for young trained farmers to the end of 2018.
- introduction of a new succession transfer proposal, incorporating an Income Tax of up to €5,000 per annum, in relation to family farms.
The new film tax credit scheme came into place in 2015. The Minister announced that the €50m cap on eligible expenditure is being increased to €70m. This change is subject to EU state aid approval.
As anticipated the reduced 9% VAT rate on related tourism activities is being retained.
Income Tax Rates, Bands, Tax Credits and Exemption Limits
The Minister reaffirmed the Government’s commitment to reduce the marginal tax rate on lower middle income earners over a number of budgets.
The top rate of Income Tax remains at 40%.
There are no changes in the Income Tax standard rate band.
Pay Related Social Insurance (PRSI) & Universal Social Charge (USC)
There are no changes to the PRSI rates and bands for 2015. On the USC side there are a number of amendments.
Incomes of €13,000 or less are exempt. Otherwise:
- €0 - €12,012 1.0%
- €12,013 - €18,668 3.0%
- €18,669 - €70,044 5.5%
- €70,045 - €100,000 8%
In the case of PAYE income the rate will remain at 8% for income in excess of
In the case of non-PAYE income in excess €100,000 the rate remains at 11%.
Medial card holders, and individuals aged 70 or over, whose aggregate income does not exceed €60,000, is being extended. In addition whose aggregate income does not exceed €60,000 will pay a maximum rate of 3.0% USC.
Pension Fund Levy
The Minister confirmed that the 0.15% levy, (introduced for 2014 and 2015) will expire at the end of 2015.
Employment Incentive Investment Scheme (EIIS)
The Minister announced that the changes announced in last years Budget have now been approved by the European Commission.
These changes were:
- the maximum amount of finance raised by a qualifying company under EIIS will be increased to €5m annually, subject to a lifetime maximum of €15m.
- Investment in the extention, management and operation of nursing homes, medium sized enterprises in all areas, and international traded services that are certified by Enterprise Ireland will now qualify under the improved scheme.
- the required holding period for shares under the EIIS scheme is being increased from 3 to 4 years.
Income from Woodlands
The tax relief for income from forest/wodlands will no longer included in the “high earners restriction”.
Home Renovation Incentive
The scheme is being extended until 31 December 2016.
Local Property Tax (LPT)
The Minister announced that he will be making a proposal to Government to postpone the property revaluation date from 2016 to 2019.
He also indicated that he has asked Revenue to change the administrative procedures in relation to the exemptions for properties significantly affected by pyrite.
Reduced VAT Rate for Tourism Sector
The 9% reduced rate introduced in 2011 as part of the Governments incentive to assist in the creation of jobs in the tourism sector is retained.
Tobacco Products Tax
The excise duty on a packet of 20 cigarettes has increased by 50 cents.
The rate of Motor Tax is reduced for all vehicles above 4,000 kgs, with a new annual rate of €500 for vehicles between 4,000 kgs and 12,000 kgs, and €900 for vehicles over 12,000 kgs.
Capital Gains Tax
A new Capital Gains Tax rate of 20% is being introduced to gains on the disposal, in whole or in part of a business up to an overall limit of €1m in chargeable gains. This new rate applies to qualifying disposals on or after 1 January 2016.
Capital Acquisitions Tax
The Class A threshhold, which deals mainly with gifts or inheritance taken by children from their parents, is increased from €255,000 to €280,000. This increase applies to gifts or inheritance received on or after 14 October 2015.
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