Our ref: JOC/OW/PK 22 May 2008 Mr. Jim Kelly Secretary Commission on Taxation Le Pole House Ship Street Great Dublin 8 Re: Submission to the Commission on Taxation Dear Mr. Kelly We refer to the advertisement by the Commission on Taxation inviting interested parties to make submissions to assist the Commission in its deliberations on the issues referred to in its terms of reference. We attach a document setting out our recommendations which we hope you will find of some assistance. If you have any questions in relation to the attached, please do not hesitate to contact Pádraig Cronin or Olivia Waldron. Yours sincerely, Deloitte & Touche SUBMISSION TO THE COMMISSION ON TAXATION Terms of Reference Area to which the Submission Relates: Our submission relates to how best the tax system can support economic activity and promote increased employment and prosperity which is part of the first term of reference of the Commission. Proposal for Change 1 Proposal for enhancement of care and management function of the Revenue Commissioners. A brief summary of the proposal The introduction of guidelines/legislation for the Revenue Commissioners to make it clearer as to the circumstances in which it is appropriate to issue concessions/rulings pursuant to their care and management role (S. 849 TCA 1997). Contextual Framework There would seem to be broad consensus that the future for Ireland Inc. is not the location of the manufacturing enterprises in this country. In addition, the level of significant “R&D facilities”, notwithstanding enhanced tax incentives, locating here will be modest given that the bulk of R&D work is customer led and consequently the main R&D facilities will be located near their key customers. Accordingly, a key growth platform in the future is the services sector. Luxembourg have successfully grown this sector, primarily in the Financial Services Sector. The relationship between the Tax Authorities, Government, Professional Advisors and Industry in Luxembourg is wholly co-operative in nature as compared to the relationship in other countries which is more adversarial. This form of relationship is giving Luxembourg a significant competitive advantage over Ireland. Proposal for Change 2 Proposal for the revision of the research and development ("R&D") tax credit regime under S766 TCA 1997. A brief summary of the proposal We recommend the revision of the R&D tax credit regime from an incremental basis to a volume basis with a consequent removal of the 2003 base year in Section 766 TCA 1997. Contextual Framework The removal of the incremental basis for the R&D tax credit should encourage companies to carry out R&D projects similar in size to projects that would have been undertaken in Ireland by the company in previous years. Such projects are not currently incentivised by virtue of the tax credit currently being available for incremental expenditure only. In addition, removing the 2003 base year from the calculation should simplify the benefits of the relief and make it more marketable internationally. This would also bring the regime in line with the regimes of many of Ireland's competitors in this area. Proposal for Change 3 Proposal for the exemption from corporation tax for companies in receipt of dividend income from overseas subsidiaries, if necessary with a 5% participation requirement. A brief summary of the proposal We would suggest that the taxation of dividend income received from overseas subsidiaries should be exempt from Irish taxation in a similar manner to the treatment of franked investment income. A minimum shareholding participation could be added if required or indeed provisions for this treatment in the case of a dividend received from a company resident in a treaty country. The change would result in an amendment to the changes introduced in S43 Finance Act 2008 and S129 TCA 1997. Contextual Framework Under changes introduced in the Finance Act 2008, dividend income received by an Irish resident company from an overseas subsidiary is taxable at either 12.5% or 25% depending on the nature of the profits out of which the dividend was paid and the territory in which the foreign company is tax resident. In addition, Ireland allows a credit against the Irish tax for foreign tax paid on the profits distributed to the Irish company, even where there is no tax treaty in place (provided the necessary shareholding requirements are met under the unilateral relief provisions). The recent changes to the tax credit regime for such dividends and the tax rate applicable to trading profits mean that in practice there is rarely additional Irish tax payable on such dividends. However, the revisions in Finance Act 2008 can require complex calculations to be undertaken in order to ensure this is no additional tax payable in Ireland. In addition, this amendment would simplify the tax system and reduce a significant administrative burden on companies particularly the large international groups in the context of dividends paid up to Ireland. Proposal for Change 4 Proposal to allow a tax deduction for capital expenditure on know-how and other intellectual property. A brief summary of the proposal We recommend that a tax deduction should be available to an Irish trading company for the acquisition of know-how and other intellectual property (IP) acquired. Contextual Framework In order to promote Ireland as a location in which to centralise the management and development of intellectual property, a tax deduction should be available for the acquisition of the know-how and other IP which will be developed by the Irish company and licensed out to other companies. The failure to allow companies to obtain a tax deduction for know-how (in many cases) or for other types of IP, puts Ireland at a competitive disadvantage compared to other countries which allow a deduction for such expenditure. This also acts as a disincentive for companies that are considering making large scale movements of their IP management and R&D activities into Ireland. The availability of a tax deduction would encourage companies to move valuable high end activities to Ireland from which additional taxable income should ultimately accrue. The absence of a relief will result in existing corporate tax payers moving their IP from Ireland with a significant adverse impact on the existing corporate tax base. Proposal for Change 5 Proposal for the elimination of dividend withholding tax declaration forms for certain non-resident persons under S172D TCA 1997. A brief summary of the proposal We would recommend the elimination of the dividend withholding tax declaration forms in the case of dividends paid by an Irish company to a non-resident company resident in all tax treaty jurisdictions. Effectively all such non-resident companies would be removed from the requirements to complete non-resident declaration forms under S172D TCA 1997 similar to the current arrangements with respect to Irish and EU shareholders. Contextual Framework The current DWT declaration forms requirements are quite burdensome in many cases due to the certification required from the company’s auditors. The elimination of this burdensome requirement is unlikely to give rise to any reduction in the overall tax take in Ireland and would succeed in reducing the compliance burden on companies in this regard. Proposal for Change 6 Proposed amendment to S430(1)(da) TCA 1997. A brief summary of the proposal Our recommendation is that Section 430(1)(da) TCA 1997 should be amended to include, in addition to companies controlled by or on behalf of Member States of the EU or Governments of treaty territories, the Government of any territory unless there are any specific states which the Revenue Commissioners would want to specifically omit. Contextual framework In the context of the recent injection of funds by the governments of certain Asian countries into European and US companies, we would suggest that the current exclusion from the close company provisions for EU or tax treaty government controlled companies is too narrow and should be expanded to cover countries such as Singapore, a country with which Ireland does not have a tax treaty. This amendment should ease the compliance burden of a relatively small number of companies and therefore should not create any significant tax loss to the exchequer. Proposal for Change 7 Continued expansion of Ireland's treaty network. A brief summary of the proposal We would encourage the Irish Revenue to continue expanding Ireland's tax treaty network. Contextual Framework Expanding Ireland's treaty network enhances Ireland's attractiveness as a location in which to do business and reduces the compliance burden of companies operating in Ireland in many situations. Many of our reliefs are dependent on having a treaty with a jurisdiction as opposed to the actual contents of the treaty and hence the network of treaties should be expanded as quickly as possible. Proposal for Change 8 Renegotiation of the Ireland-US double tax agreement. A brief summary of the proposal We would encourage the Irish Revenue to renegotiate Ireland's double taxation agreement with the US at the earliest opportunity in order to reduce the withholding tax on dividends from 5% to 0% (where a specified participation is held) and bring the limitation of benefits clause in line with OECD guidance. Contextual Framework Many of the more recent tax treaties negotiated between the US and other territories have no withholding tax in such cases and the 5% withholding tax applicable to payments to an Irish company leaves Ireland at a competitive disadvantage vis-ŕ-vis other jurisdictions. Ireland does not currently operate DWT on dividends to a US owned group (provided the DWT declarations are in place) and consequently the amendment should have no additional tax cost from an Irish perspective. In addition, a revision of the limitation of benefits clause should not create any additional tax costs from an Irish perspective. Proposal for Change 9 Proposal for the introduction of a tax credit for foreign tax on royalties from non-treaty territories. A brief summary of the proposal The introduction of a relief (similar to that currently in S449 TCA 1997) which allows companies to obtain credit on a unilateral basis for foreign tax suffered on royalty income. Contextual Framework S449 TCA 1997 currently allows credit on a unilateral basis for foreign tax suffered on income receivable from the sale of computer software or the provision of computer services provided the income qualifies for manufacturing relief. Manufacturing relief does not apply to new businesses which have commenced operations in Ireland since July 1998 and therefore this relief is not available to such companies. In addition, for companies that currently enjoying the benefits of this relief i.e., companies who currently qualify for manufacturing relief on income from the sale of computer software/computer services etc, unilateral relief will cease to be available on the expiration of manufacturing relief on 31 December 2010. This will become a more significant issue as 31 December 2010 approaches and we would recommend the proposed change be made at the earliest opportunity. We have no other supporting information to provide in relation to the above proposals. Proposal for Change 10 (suggest include as number 2) Proposal for the amendment of Section 811A provisions introduced in Finance Act 2008 A brief summary of the proposal The removal of the burden of proof introduced in the Finance Act 2008 and the reinstatement of a right for a tax payer to have their affairs closed after a four year time limit. Contextual Framework The 2008 amendments constitute significant legal, policy and procedural changes to tax legislation. They reduce the burden of proof required by the judiciary, at the Appeal Commissioners, the Circuit Court and the High Court to decide whether a transaction is a tax avoidance transaction, arguably, below that which is required in a civil action. Section 811A inter-alia now provides that where all courts, other than the Supreme Court, consider that there are grounds on which the transaction, or part of a transaction specified in the notice of opinion, could be reasonably considered to be a tax avoidance transaction that the opinion or the relevant part of the opinion shall stand. Furthermore, the changes raise equity issues in that it requires the courts to treat taxpayers who have filed a protective notification differently to those who have not. The wider ramifications of this change and the perceptions of this change need to be borne in mind in the context of Ireland Inc. and attracting inward investment. Overseas multinationals will have to be made aware that that the burden of proof in a tax case for the judiciary is lowered and that the disclosure of transactions impacts upon the legal treatment in the court system – concepts that it may be said are present in countries with large domestic tax bases, which may be true. However, Ireland Inc depends significantly on inward investment and inward investment is mobile, particularly in situations where there is an uncertain tax climate. A further issue arising from the 2008 changes is that the four year time limit has been set aside in the context of the application of Section 811 and Section 811A which has significant commercial implications for acquisitions as the vendors and investors be they Irish or overseas are subject to open ended liabilities in any prospective purchase transaction.