Last updated August Important Note

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1 [14.0.1] Taxation of companies engaged in manufacturing trades, certain Trading operations carried on in Shannon Airport and certain trading operations carried on in the Custom House Docks area Last updated August Important Note The scheme of manufacturing relief expired on 31 st December The relief was only available to companies which commenced a manufacturing trade before 23 rd July 1998 or companies which concluded a grant agreement with an industrial development agency on or before 31st July The scheme expired for other manufacturing companies on 31 st December 2002 and for licensed operations in the IFSC and Shannon on 31 st December This master document reflects how the relief operated under the relevant TCA when it was available. Summary Part 14 TCA 1997 governs the 10% scheme for manufacturing industry generally. The relief applies to income derived by companies from sales of goods manufactured by them in the State, whether that income arises from domestic or export sales and to income from the rendering in the State of manufacturing services (the subjecting of goods, not owned by the company providing such services, to a process of manufacture). Retail sales and sales into intervention are excluded. Section 443 Section 443 defines the goods the profits from the sale of which may qualify for relief under this Part. Broadly, the goods must be goods manufactured in the State in the course of a trade by the company claiming the relief in respect of that trade. In addition to this general definition of goods in subsection (1), subsections (2) to (4) expand on the definition to include certain specific commodities while subsections (5) to (7) exclude certain goods from this basic definition. Subsections (8) to (19) treat for the purposes of the relief certain services and activities as being the manufacture of goods and receipts from the sale of such services and activities as amounts receivable from the sale of goods. This mechanism ensures that such services and activities are brought within the ambit of the relief. Manufacture or cognate words are not defined for the purposes of this Part. The words thus have their normal and natural meaning (that is, manufactured goods are goods subjected to a process of manufacture as normally understood). Whether or not a given trading activity constitutes manufacturing for the purpose of relief under this Part is a question of fact to be determined by the inspector to whom a claim for relief under section 448 is submitted or, in the event of an appeal against his/her decision, by the Appeal Commissioners. Guidance as to what constitutes manufacturing for the purposes of relief under this Part may be obtained from the considerable body of case law which has arisen on the subject. 1

2 Tests and guidelines to be applied in determining whether an activity is or is not manufacturing have been laid down by the Courts in a large number of decided cases, including the following cases: Cronin V Strand Dairy Ltd., ITR Vol. III, p. 411 McCann V O Culachain, ITR Vol. III, p. 304 Irish Agricultural Machinery Ltd. V O Culachain, ITR Vol. III, p. 611 Brosnan V Leeside Nurseries, Supreme Court Decision, 30 Oct Many of the decided cases relate to the legislation prior to the insertion by Finance Act 1990 of subsection (5) into section 39 Finance Act 1980 which is now section 443(6) TCA Meaning of goods goods are goods manufactured within the State in the course of a trade by the company which is claiming relief under this Part in relation to that trade. The explicit references in the definition to the trade in respect of which the relief is claimed are made for the purpose of excluding from the meaning of goods for the purpose of the relief any goods manufactured by the company in the course of a separate trade in respect of which it may continue to claim export sales relief until the end of its span of such relief. Such goods are not therefore goods for the purpose of the relief provided by section 448. Where a manufacturing company supplies its products to another company which then sells the goods and one company is a 90% subsidiary of the other or both are 90% subsidiary of a third company, then, sales by the selling company of the other s manufactured goods are regarded as sales of goods manufactured by the selling company. A 90 per cent subsidiary of a company is defined in section 9 as meaning a company not less than 90 per cent of the ordinary shares of which are owned by the other company. If the inter-company sales show a mark-up over the production costs of the manufacturing company, that company qualifies in the normal way for relief under section 448 in respect of the income from the sale of the goods to the selling company. Accordingly this provision can result in both companies qualifying for the relief. This is justifiable because, in effect, the companies are a single entity divided into separate manufacturing and sales units. Extension of meaning of goods The definition of goods is extended to include fish produced in the State on a fish farm, plants cultivated in the State by the process of plant biotechnology known as micro-propagation or plant cloning, 2

3 meat processed in the State in premises approved and inspected under the European Communities (Fresh Meat) Regulations, 1987 (S.I. No. 284 of 1987) (it should be noted that where meat processing is carried on in any other premises it may still qualify for relief if it satisfies the general tests applied to any process to determine whether it constitutes the manufacture of goods), fish processing carried out in the State unless it consists of the preparation of food for immediate consumption or the fish is sold by retail. Exclusions from meaning of goods Excluded from the definition of goods are goods sold by retail by the manufacturing company. Sales of goods which would constitute wholesale selling, the direct selling of goods to a trade for use in the trade or to some other corporate person for use in the undertaking of that person (for example, a sale of furniture to a church or Government Department) are not caught by this exclusion. Goods are not to be regarded as manufactured if the process from which they derive consists primarily of breaking down bulk materials, preservation, pasteurisation and maturation of foodstuffs, preparing food or drink for immediate consumption, improving or altering articles or materials without imposing on them a change in character, repairing / reconditioning. This provision does not affect the provisions of subsections (2) to (4) which extend the meaning of goods or the provisions of subsections (8) to (15) which deem certain activities to be the manufacture of goods. In all such cases manufacturing relief is to be available. This provision is without prejudice to the generality of the existing tests and guidelines laid down by the Courts to determine whether goods are manufactured. Accordingly, in determining whether goods are manufactured, it is necessary to examine both the product sold by the company and the process from which the products resulted. The product is to be examined to consider what it is, how it appears, what qualities it possesses, what value it has. The process is to be examined to identify the extent to which it conferred on the product the characteristics that it possesses. If the income from the sale of the product is to qualify for relief, the changes in the product and the extent to which these changes were conferred on the product by the process must be of sufficient degree to regard the goods as manufactured. 3

4 This provision emphasises the nature of the process so that in the case of certain products the nature of the process may be decisive in taking a company outside the scope of the relief, even if the product test is otherwise satisfied. It is not possible within the terms of the legislation to analyse a manufacturing activity into its component parts and to suggest in relation to each part that it could be excluded by one of these five categories. The activities by which the goods are produced should be viewed as a single process and no attempt should be made to break this single process into its component parts. The process carried out by a company should be looked at in its totality and is only taxed at the standard rate if it falls primarily into one only of the specified categories. In addition, a company cannot qualify for the low rate by arranging for some other person to carry out a manufacturing process on its behalf. A company only qualifies if it carries out a manufacturing process itself. This exclusion does not apply to closely connected companies which structure themselves so that one company manufactures the goods and the other company sells them. In such cases, both companies qualify for the 10 per cent rate in respect of the manufactured goods by virtue of subsection (1)(b). That arrangement does not apply, of course, to goods sold by retail. A company may subcontract part of the work. In such a case the activities of that company should be examined to see whether, taken together, they are sufficient to constitute the manufacture of goods. Intervention sales (normally of butter, milk powder or processed beef) are excluded from relief under this Part. An anti-avoidance provision relating to indirect sales into intervention is incorporated so as to ensure that a company which sells goods to a subsidiary at a normal profit does not get the benefit of the low rate of tax where the subsidiary on-sells the goods into intervention at the price it paid for them (thus earning no taxable profit). However, the rendering of manufacturing services (for example, de-boning) to meat owned by the intervention agency is not to be regarded as a sale into intervention and, therefore, such a service is not disqualified for the relief. Services/activities treated as the manufacture of goods The rendering of certain services and activities in the State are treated for the purposes of relief under this Part as the manufacture in the State of goods. As the rendering of such services/activities does not involve the selling of any actual goods provision is made to ensure that the receipts from such activities are regarded as amounts receivable from the sale of goods for the purposes of applying the relief under this Part. The following are the services/activities concerned. The repairing of ships. The rendering of engineering services. These are design and planning services in connection with chemical, civil, electrical or mechanical engineering works executed outside the territories of the Member States of the European Communities (including the territorial waters of such countries). Works includes public works such as hospital, schools, housing estates, etc, or any large construction project, such as 4

5 dams or harbours. Moveable entities are not regarded as works (for example, ships or aircraft). Certain fixed oil rigs may, however, qualify as works. The rendering of computer services. This encompasses data processing services and/or software development services and also technical or consultancy services relating to either of these services for which employment grants were made by the IDA, the IDA (Ireland) or Forbairt or for which an appropriate grant or financial assistance was made by the Shannon Free Airport Development Company Limited, or for which appropriate financial assistance was made available by Údarás na Gaeltachta. The effect of this provision is to extend to cases of on-line transmission of computer-based data processed in the State the same treatment as is provided for cases where there is a sale of a tape or disc on which information or programmes had been recorded. Qualifying shipping activities (within the meaning of section 407) carried on in the course of a qualifying shipping trade (within the meaning of section 407). A qualifying shipping trade is, in effect, a trade carried on by a company which consists exclusively of qualifying shipping activities. A mixed trade also qualifies in respect of the part of the trade consisting solely of the carrying on of qualifying shipping activities and which is treated as a separate trade by virtue of section 407(3). qualifying shipping activities are trading activities carried on by a company which come under 6 headings related to the use of a qualifying ship. These are - the basic activity of a shipping company the carriage of passengers or cargo for reward (that is, on a commercial basis) by sea. The carriage must be by sea so as to exclude the element of land transport included in any arrangement such as door-to-door cargo transport, ferry-train passenger transport or roll-on/roll-off services. Land transport is excluded so that a shipping company (whose activities are by virtue of this subsection taxed at the 10 per cent rate of corporate tax) would not have an unfair advantage over a company engaged only in land haulage whose profits could be chargeable to tax at the standard or reduced rate, - the provision by the company using the qualifying ship for the purposes just described of on-board services such as the operation of ships cinemas, bars or restaurants ancillary to the carriage of passengers and cargo, - the contracting-out to specialist operators, by the company operating the qualifying ship, of the on-board services just described, - the subjecting of fish to a manufacturing process on board a qualifying ship. If a process is considered to be a manufacturing process when carried on onshore it is also to be treated as a manufacturing process when it is carried on in a factory ship. Processes treated as manufacture would typically involve 2 or more of the following processes filleting, mincing, 5

6 cooking, smoking, quick freezing and packaging. Each claim should be examined by reference to the details of the process involved, - the wet leasing of a qualifying ship for use for the purpose of the carriage of passengers or cargo for reward or the subjecting of fish to a manufacturing process aboard a qualifying ship. Under a wet lease or non-demise charter the lessor provides the ship, crew, fuel, provisions, etc and is responsible for the direction and control of the ship and the crew throughout the period of the charter. This is in contrast to a dry lease or bare-boat charter under which the lessor provides the ship only and the lessee is responsible for the provision of the crew and the direction and control of the vessel and crew. The lease payment in this instance would be chargeable at the standard rate of corporation tax but if the lessee was carrying on a qualifying shipping trade the income from that trade would be chargeable at the 10 per cent rate of corporation tax, - the transporting of supplies or personnel to, or providing services in respect of, a mobile or fixed rig, platform, vessel or installation of any kind at sea. qualifying ship is a seagoing vessel which - has majority Irish ownership, or is leased from a foreign lessor without crew, - complies with all the requirements of the Merchant Shipping Acts, including Irish standards as to ship safety and the manning of such ships with seafarers having Irish Certificates of Competency or Certificates recognised as equivalent by the Irish Authorities, and - is of adequate size to engage in reasonable commercial operations with a modern means of propulsion. Excluded as qualifying ships whether or not they satisfy any of these criteria are fishing trawlers (other than a factory ship which would otherwise be treated as a fishing vessel), tugs (other than certain ocean-going tugs), dredgers and floating rigs and working platforms of any kind and vessels used for servicing offshore installations such as oil-rigs, platforms, factory ships and the like. Also excluded by means of a catch-all provision, is any other vessel, not specified above, which is of a type not normally used for qualifying shipping activities. The export by a Special Trading House in the course of selling by wholesale of goods manufactured in the State by a company other than the Export Trading House. A Special Trading House is a company which exists for the sole purpose of selling Irish manufactured goods by wholesale on the export market. Such companies are required to be licensed by the Minister for Enterprise, Trade and Employment. The repair or maintenance of aircraft, aircraft engines or components. Excluded are such operations carried on within the Shannon Airport 6

7 Area as they are entitled to the 10 per cent rate by virtue of section 445. The production of a film which is largely produced in the State. The film must be a film which would be shown in the cinema or on television or is for training or documentary purposes. At least 75 per cent of the production work on the film must be carried out in Ireland. The remanufacture or repair of computer equipment or subassemblies by the company or a connected company which originally manufactured the equipment or subassemblies. The sale of goods by wholesale purchased by a co-operative, all or a majority of the members of which are themselves co-operatives, from such members where such member would themselves be entitled to manufacturing relief in respect of such goods. The sale by an agricultural co-operative of milk purchased from its members to a company which is certified as a processor of milk products. The list of milk products qualifying which is set out in the subsection may be extended where the Minister for Finance after consultation with the Minister for Agriculture and Food approves as milk products other products made from milk or from a by-product of milk. A profit arising from a foreign exchange transaction which is treated under section 80 as a profit of a trade. The production of a newspaper (including the rendering of advertising services in the course of the production of the newspaper). For this purpose a newspaper is a newspaper which is normally published at least fortnightly and the printed matter in which consists wholly or mainly of information on the principal current events and topics of general public interest. Also the newspaper must be in a format which is commonly regarded as newspaper format and must be printed on news print and be intended to be sold to the public. Advertising services Advertising receipts of a company which carries on a trade of producing a newspaper, magazine or similar product are not to be treated as income from the sale of manufactured goods. This provision, however, does not apply to advertising income of a newspaper of a type within the meaning of subsection (19). This provision denies the benefit of the 10 per cent rate to income from the provision of advertising services rendered in the course of the production of a newspaper (other than a newspaper within the meaning of subsection (19)), a magazine or other similar product. 7

8 Manufacturing services Manufacturing services carried out in the State by one company on materials belonging to another person may qualify for relief under this Part despite the fact that the arrangement does not involve a sale of manufactured goods by the company rendering the services. The cases covered by this treatment of regarding the rendering of services as the manufacture in the State of goods normally involve a manufacturing company receiving raw materials or partly-processed goods from another person and carrying out, for a fee, manufacturing process before returning the goods to their owner for sale or further processing. If the owner is a company, it would not qualify for relief on its income from the sale of the goods if it did not itself carry out in the State a process of manufacture on the goods. Where transactions take place at artificial prices between associated persons for the purpose of inflating the amount of a company s profits to which the relief would apply and of reducing the profits of the other party to the transaction which would be liable to tax at the normal rate, the income or losses of both parties fall to be recomputed for tax purposes on the basis of an arms-length price so as to negative any tax advantage which would be involved in shifting profits from one party to the transaction to the other - (section 453). Relief is not available under this Chapter in respect of corporation tax referable to income from mining operations or construction operations even where such income arises in the course of manufacturing activities. Mining operations are as defined in section 444(1)(a); construction operations are as defined in Chapter 2 of Part 18 - (section 444). Section 448 CALCULATION OF MANUFACTURING RELIEF Section 448 is the substantive relieving provision for the 10 per cent scheme. It provides for a reduction by a specified fraction in the corporation tax referable to the income from the sale of goods manufactured in the State by the company claiming the relief. The specified fraction is 11/16ths in the case of such corporation tax which is referable to the financial year 1998, 9/14ths in the case of such corporation tax which is referable to the financial year 1999, 7/12ths in the case of such corporation tax which is referable to the financial year 2000, 1/2 (one-half) in the case of such corporation tax which is referable to the financial year 2001, 3/8ths in the case of such corporation tax which is referable to the financial year 2002, and 8

9 1/5th in the case of such corporation tax which is referable to the financial year 2003 or any subsequent financial year. The reduction is, in effect, from the standard rate of corporation tax to 10 per cent. Relief may be given, subject to the making of a claim before the assessment for the relevant period has become final and conclusive, as respects income from sales of such goods which arises in an accounting period or part of an accounting period ending where section 443(11) or (12) applies, on or before the 31 December, 2000, in any other case, on or before 31 December, 2002, except in the case of manufacturing trades being carried on before 23 July, 1998 and manufacturing trades approved for grant assistance before 31 July, 1998, where title to the 10 per cent rate ceases on 31 December, 2010 It is to be noted that in the case of sections 445 (Shannon) and 446 (IFSC) the relief given by virtue of these sections is not available in respect of income arising after 31 December, 2002, except in the case of income arising from operations approved for carry on in Shannon before 31 May, 1998, or approved for carry on in the IFSC before 31 July, 1998, where title to the 10 per cent rate expires on 31 December, The section lays down rules for the computation of the relief under this Part. The principal rule is that the corporation tax referable to income from the sale of qualifying goods this is the tax which is to be reduced by the specified fraction is to be quantified as the same proportion of the corporation tax referable to the company s income ( the relevant corporation tax ) as the income from the sale of goods (quantified by reference to sales) bears to the total income brought into charge to corporation tax. relevant corporation tax is the corporation tax which would be chargeable for the relevant accounting period before any deduction from that tax under this section, sections 22A, 239, 241, 440, 441, 449, 644B and 827, and paragraphs 16 and 18 of Schedule 32. The resulting corporation tax is then subject to a further exclusion, namely, the exclusion of the corporation tax chargeable on the part of the company s profits attributable to chargeable gains for that period. [See also note on subsection (5A).] The part of the company s profits attributable to chargeable gains for that period is taken to be the amount brought into the company s profits for the relevant accounting period for the purposes of corporation tax in respect of chargeable gains before any deduction for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description (such other amounts would include section 396(2) losses, excess Case V capital allowances (section 308(4)), and group relief (section 420)). 9

10 The purpose of this provision is to enable the relief under this Part to be applied to the corporation tax referable to the income from the sale of qualifying goods before the granting of reliefs which are not set against that income but against the tax on that income. Any relief due under these provisions of the Corporation Tax Acts is, of course, given in addition to relief under this Part. The relief The corporation tax referable to the income from the sale of qualifying goods is defined as the amount which bears the same proportion to the relevant corporation tax as the income from the sale of qualifying goods bears to the total income for corporation tax purposes of the relevant accounting period. In other words, the amount of tax to be reduced by the specified fraction can be determined by the application of the following formula income from sales of ''goods'' Relevant corporation tax x total income The sales of goods must be made in the course of carrying on a trade which consists of or includes the manufacture of goods. A company must claim and prove its entitlement to the relief for each relevant accounting period. Income from the sale of goods Where the income of a trade which is the subject of a claim for relief under this Part arises not only from sales of goods but also from sales of merchandise (that is, goods other than goods defined in section 443) or from sources other than sales of goods and merchandise (for example, fees for services rendered) it is necessary to isolate the income of the trade which arises from the sale of goods. Income from the sale of goods is after deducting relief in respect of charges, losses, and excess charges as defined in subsection (1). (An effective 10 per cent rate of corporation tax is achieved by reducing corporation tax referable to income from manufacturing described in legislation as income from the sale of goods. Corporation tax referable to income from the sale of goods is calculated by apportioning corporation tax for the accounting period between income from the sale of goods and other income. If income from the sale of goods was not net of the ringfenced losses, etc. the income from the sale of goods would be overstated, corporation tax referable to income from the sale of goods would be overstated and, consequently, the reduction in corporation tax would be excessive so as to result in an effective rate lower than 10 per cent.) The company s income from the sale of goods is to be taken to be the same proportion of its income for corporation tax purposes from sales of goods and merchandise as the amount receivable (that is, sales revenue) from the sale of goods bears to the total amount receivable from the sale of goods and merchandise. The only sales receipts to 10

11 be taken into account for this purpose are those of the trade which is the subject of a claim for the relief provided by this Part. Effectively, income from the sale of goods is determined by the formula Amount receivable from sales goods Income from the sale of x goods & merchandise Amount receivable from sales of goods & merchandise [For any accounting period ending on or after 18 th February 2008 trading charges under S.243A, trading losses under S.396A and group relief under S.420A must be deducted from the above figure where they have been allowed against the company s income for the relevant accounting period from the sale of those goods see Section 448(3) (b). Note also that for the purpose of calculating 'total income brought into charge to corporation tax' as referred to in subsection (2), any amounts allowed under Sections 243A, 396A or 420A and any excepted trade profits (S.21A) must be deducted from the sum determined by S.4(4)(b)] The trading income from the sale of goods and merchandise to be so apportioned is a company s income from the sale in the course of the trade of goods and merchandise if the receipts of the trade arise from sales of goods and merchandise only. Where the receipts of a trade include amounts in addition to receipts from sales of goods and merchandise the trading income referable to sales of goods and merchandise is to be adjusted to whatever amount the inspector or, on appeal, the Appeal Commissioners consider to be just and reasonable. This later provision may apply to a wide variety of receipts such as fees for services rendered, receipts from insurance against loss of profits or loss of stock-in-trade, or subsidies which are to be regarded as revenue receipts. Generally the amount to be deducted from the income for corporation tax purposes of the trade is the total of such receipts less any attributable expenses. The balance of the income of the trade after such a deduction is the income of the trade from sales of goods and merchandise. The company s income from the sale in the course of its trade from goods and merchandise is the amount before any deduction for any of the ringfenced losses, charges or group relief. Any distortions which might arise, in determining the income from the sale of goods, because of the impact of variable levels of duties or VAT on the sale prices of the various goods and merchandise included in the amounts receivable from the sale of goods and the amount receivable from the sale of goods and merchandise is eliminated by allowing the deduction from the amount received from the sales of goods and merchandise of any amount of duty or VAT paid or charged in respect of goods or merchandise. Duty or VAT may increase the cost of raw materials used in the manufacture of goods or the sale price of goods sold on the home market as opposed to goods exported. By 11

12 eliminating all such variables from amounts receivable from sales of goods or from sales of goods and merchandise, a more accurate figure for income from sales of goods is obtained. The inspector, by notice in writing, may call for the furnishing of such information or particulars as may be necessary to given effect to this provision. The furnishing of such information or particulars as is required by the inspector is essential if a claim for relief under this Part is to be admitted. Exclusion from manufacturing relief calculation of tax charged to higher rate of corporation tax and of the income underlying that charge For the purposes of calculating manufacturing relief the relevant corporation tax (as defined in subsection (1)) of a company for an accounting period is reduced by the amount, if any, of the corporation tax attributable to income which has been charged to the higher rate of corporation tax under section 21A, and the total income brought into charge to corporation tax for the accounting period, calculated in accordance with section 4(4)(b), is reduced by so much of the profits of the company for the accounting period as is charged to the higher rate of corporation tax under section 21A. This provision is necessary because, without it, if the corporation tax of a company included tax charged at the higher rate under section 21A and its total income included income underlying that charge, the formula used in subsection (2) to calculate manufacturing relief would not result in the desired effective rate of 10 per cent on manufacturing income. Time limit A claim for relief under this Part must be submitted before the assessment for the appropriate accounting period becomes final and conclusive. 12