Ireland taxation: Commission on ireland Taxation reportIntroduction
The Commission on Taxation was established by the Irish Government in early 2008 to review the structure, efficiency and appropriateness of the Irish taxation system. The Commission published its report on 7 September 2009. The report is wide ranging and deals with many areas of the Irish taxation system.
Included in the report are many recommendations to the Irish Government. We have included in this NewsFlash those recommendations that, if implemented, are likely to have the greatest impact on employers and their staff.International assignment services
Tax residency rules -
The Commission has recommended that additional criteria be introduced to supplement the 183 days in the tax year / 280 days in current and preceding tax year basis for residence in Ireland. It recommends introducing a "permanent home" test and "centre of vital interests" test to the tax residency criteria. This is a change that it is likely to take place sooner rather than later. This will make it more difficult for individuals with homes in Ireland, with significant economic or social interests in Ireland or with Irish employment income to manage their presence in Ireland to remain nonresident.
Deloitte's view - This is likely to be politically acceptable given that it is targeted at wealthy individuals with ties to Ireland but who are non-resident through management of their presence in the State. This is likely to have a greater impact on outbound assignees than on inbound assignees.Remittance basis of tax -
The Commission views the remittance basis of taxation as a "historical anachronism" and recommends its withdrawal for income tax and capital gains tax. This, coupled with recent changes to the remittance basis, is likely to have a negative impact on the attractiveness of Ireland as a place for non-domiciliaries to work. However, the Commission acknowledges that the withdrawal of the remittance basis would require a lead-time of 3 - 5 years.
The Commission has considered the need for Ireland to be attractive to multi-nationals and mobile employees. Its recommendation is the introduction of a targeted scheme based on specific skills. Relief in relation to individuals with the requisite skills that cannot be met locally would be given as a deduction from taxable income. The Commission proposes a cap on the relief at 25% of total income up to a ceiling of €250,000 and would be for a period of up to 3 years. The maximum relief available would therefore be €62,500.
The Commission also recommends that the partial re-introduction of the remittance basis in Finance (No. 2) Act 2008 be discontinued.
Deloitte's view - If implemented, the removal of the remittance basis of taxation is likely to impact the attractiveness of Ireland as a place for foreign individuals to work or to relocate to for a period of time. The Commission's recommendation in favor of a targeted scheme based on specific skills would link in with the visa requirements. However, the reliefs highlighted in the report are such that they are unlikely to be an incentive to relocate to Ireland.
It is unlikely that any changes to the remittance basis of taxation would be introduced in the December 2009 budget and there is likely to be lobbying against such a change in the future.Tax incentives for retirement provision -
Currently, a taxpayer's contributions towards a pension scheme are tax deductible (within certain limits) and the taxpayer receives relief at their marginal rate of tax (up to 41%). Relief is available for contributions to non-Irish pension schemes where certain conditions are met. The Commission recommends abolishing and replacing the current system with a system whereby the Exchequer contributes €1 for every €1.60 contributed by the taxpayer towards their retirement provisions. It is not clear how the proposed changes would impact the current relief available for contributions to non-Irish pension schemes.
Currently, employer social security (at 10.75%) is due on remuneration net of employee pension contributions, where employee contributions are paid by the employee via the payroll. If the Commission's recommendations are accepted, one consequence will be that relief from employer's social security on employee's pension contributions would cease.
Deloitte's view - It is unlikely that these recommendations would be implemented in the short term due to the extensive legislative changes required. However, if implemented they will have an impact on assignees to Ireland who are taxable in Ireland on their foreign employment income.Tax treatment of lump sums paid on retirement -
Currently, upon retirement, an individual is entitled to take a portion of his/her pension fund as a tax-free lump sum. Currently, the tax-free lump sum is limited to 25% of the fund or 1.5 times final salary depending on the arrangements in place and subject to a maximum lump sum payment of €1,354,521 for 2009.
The Commission recommends that the portion that can be taken tax-free is limited to €200,000 with the balance taxable at the standard rate. This will have an impact on taxpayers with a final salary in excess of €133,333.
Deloitte's view - This change would be relatively easy to implement and is likely to be introduced in the December 2009 budget. The proposed reduction has been widely anticipated. It is likely that employees may wish to negotiate early retirement (where this is pensionable) which may have implications for employer funding requirements.
Standard Fund Threshold (SFT) -
The Commission also recommends a reduction in the limit (SFT) on the capital value of an individual's tax relieved pension fund. Currently, this SFT is set at €5,418,085.
The Commission recommends that there should be a correlation between the annual maximum earnings for tax relief on pension provisions (reduced from €275,239 to €150,000 in 2009) and the standard fund threshold. The recommendation is that any movement in the annual earnings limit should be accompanied by a movement in the standard fund threshold. If the current limit of €150,000 were applied, the recommendation would result in a reduction in the SFT to €2,955,000 and may be implemented in Budget 2010.
Deloitte's view - In the area of pensions, there are a number of areas in which employees may wish to consider taking action.
- Employees near retirement who can qualify for the lump sum might consider terminating their employment prior to Budget 2010 to avoid the tax-free element being capped at €200k.
- If an employee has scope to fund his/her pension scheme above €2,955,000 (up to the current maximum SFT of €5,418,085), before Budget 2010, he/she should consider doing so in advance of Budget 2010.Child benefit -
The Commission has recommended that the taxation of child benefit is benchmarked against other alternatives, such as means-testing. If the taxation of child benefit is introduced, the Commission recommends a child tax credit is incorporated to offset the additional tax for those on lower incomes. Given the scale of the costs to the Exchequer of providing child benefit, it is likely that some measure of taxation on child benefit will have to be introduced, especially as it is currently provided regardless of family circumstances.
Deloitte's view - These measures will have an impact on any individuals currently in receipt of child benefit. This could include certain categories of assignees to Ireland depending on their individual situation, i.e. citizenship/nationality/country where social security contributions are made, where family resides, employment status of spouse. Where an assignee to Ireland has children and is paying social security in Ireland, they should consider if they can claim child benefit if they are not already doing so.Social Security (PRSI) -
The Commission made several recommendations in relation to social security (PRSI). The PRSI base should be broadened and a review of the system should take place. The Commission make the following recommendations:
- A similar PRSI base should apply to the employed and self-employed and the rate for both categories should be the same,
- The employee PRSI ceiling (currently €75,036) should be abolished over a phased period,
- Employees should be subject to PRSI on unearned income (e.g. deposit interest, dividend income),
- Share-based remuneration should be subject to PRSI (see the section on Compensation & Benefits for more information),
It should be noted that the employee PRSI ceiling was increased significantly in the emergency budget in April 2009 (from €52,000 to €75,036).
Deloitte's view - It is likely that a further significant increase will be introduced in the December 2009 budget. In addition, it is likely that PRSI would be extended to unearned income for employees although this may be a longer term measure.Employee tax credit -
Currently, the Employee Tax Credit amounts to €1,830 and is available where an individual is subject to tax under the PAYE system. Therefore, this credit can be claimed where an employee of a non-Irish employer is subject to wage withholding (PAYE) on the income related to their Irish workdays. It is proposed that the Employee Tax Credit will be replaced by an Earned Income Credit. It is proposed that the Earned Income Credit is extended to the self-employed and proprietary directors and should be at a more modest level than at present.
Deloitte's view - Any changes in this area are likely to be phased in over a period of time. Any reduction in the credit available will impact on those assignees working in Ireland under a foreign employer that does not benefit from an exemption from PAYE.Property tax -
While it's not specifically a "global employer" issue, the Commission has recommended the introduction of a Property tax in the region of 0.3% apply to residential units based on the market value of the property. This Property tax is intended to replace the very high levels of Stamp Duty on residential homes and as an interim measure, it is recommended that an exemption from Property tax be implemented for purchasers of principal private residences who paid stamp duty in the last seven years.
Deloitte's view - Given the scale of the market valuations required and the political difficulties in making such a change this is a measure that would, if ever introduced, be introduced in the long term.Share based compensation
Discontinuation of social security exemption on share based remuneration -
Currently share plan benefits (both approved and unapproved) are generally exempt from Irish social security charges known as PRSI (Pay Related Social Insurance) and the health levy.
The Commission has recommended that PRSI and the health levy be applied to all share based remuneration. The Commission goes on to specifically recommend that:
- The PRSI/health levy exemption should be discontinued for Unapproved Share Option plans leading to an increase in an employee's effective rate of up to 9%, and an employer's PRSI liability at a rate of 10.75%. Note that there is currently no income levy exemption on Unapproved Share Option plans.
- The PRSI/health levy and income levy exemption should be discontinued for the following popular Revenue approved plans leading to a maximum combined PRSI/levies charge of 15% and an employer's PRSI liability at a rate of 10.75%.
. Approved Profit Sharing plans
. SAYE (Save As You Earn) plans
It should be expected that the above recommendations may be announced in Budget 2010, due to be announced on 2 December 2009.
It is also likely that if employers will be obliged to operate PRSI/health levy withholding, the Irish Revenue are likely to oblige employers to operate PAYE withholding on the same unapproved share plan benefits. Currently, unapproved share plan benefits are generally not subject to PAYE, but are subject to income tax via the self assessment system.
Deloitte's view - If implemented in the current format, these recommendations could have significant cost implications for employers.
Employees should consider the early exercise of unapproved share options prior to Budget 2010 (if economically sensible to do so) to avoid these additional liabilities.
Employers may also wish to take account of the following potential tax savings. Employers should consider:
- The implementation of new share plans whereby there is a low value on award subject to income tax/PRSI/levies and a favorable capital gains tax treatment on the disposal of the underlying shares (rate currently 25%);
- The acceleration of the award of those share benefits that are taxable at the date of award to before Budget 2010;
- The acceleration of the vesting of those share benefits that are taxable at the date of vesting to before Budget 2010.Revenue approved share option schemes -
These schemes currently offer significant savings to employees such that the gain on the exercise of the approved options are exempt from Irish income tax, PRSI, health levy and the income levy, subject to conditions being fulfilled.
The Commission recommends the abolition of these exemptions so that these schemes will be treated the same as unapproved schemes in the future.SAYE scheme extension (ESPP plans) -
While the Commission recommends the application of PRSI, health levy and income levy to SAYE schemes, they have also recommended that the existing rules regarding the Revenue approval of SAYE schemes be broadened so that Employee Stock Purchase Plans (ESPP) can come within the income tax exemption.
Deloitte's view - Multinational companies which already operate ESPP plans may wish to consider implementing such plans in their Irish subsidiaries, should the recommendation be legislated for.Income tax relief for new shares purchased on issue by employees -
Currently, there is a single lifetime tax deduction of up to €6,350 available to an employee who subscribes for shares in their employer's company, subject to a number of conditions being satisfied.
The Commission recommends the abolition of this relief due to the very low participation level. Employers who satisfy the conditions for the relief may wish to consider making this scheme available to employees so as to avail of the relief before it is possibly abolished in Budget 2010.Capital gains tax (indexation) -
Indexation relief is currently only available for capital gains tax calculation purposes on periods of ownership up to 31 December 2002. The Commission recommends that gains attributable to inflation should be excluded from the charge to capital gains tax.Termination payments -
The Commission has suggested the restriction of the tax exemptions on termination at €200,000. It is envisaged that the affected reliefs will be the Standard Capital Superannuation Benefit (SCSB) and Foreign Service relief.
The report also suggested that Statutory Redundancy entitlements remain and the Standard Capital Superannuation Benefit (SCSB) and Top Slicing reliefs be simplified.