Conference for Recently Qualified AITI Registered Tax Consultants

Transcription

1 Conference for Recently Qualified AITI Registered Tax Consultants Thursday 8 September 2011 Morrison Hotel

2 While every effort is made to ensure that the information outlined in these papers is accurate, the Irish Tax Institute and authors can accept no responsibility for loss or distress occasioned to any person acting or refraining from acting as a result of the material published herein. Any views or opinions expressed are not necessarily subscribed to by the Irish Tax Institute. Professional advice should always be sought before acting on any topic covered in these notes. Irish Tax Institute and the crest logo are trademarks of the Irish Tax Institute Consolidation of legislation and annotations Irish Tax Institute 2011 unless where otherwise stated. All rights reserved. No part of this publication may be reproduced or transmitted in any material form or by any means, including photocopying and recording, without the prior written permission of the copyright holder, application for which should be addressed to the publisher. Such written permission must also be obtained before any part of this publication is stored in any medium by electronic means including in a retrieval system of any nature.

3 Corporate Tax for Busy Irish Businesses Presented by William Doran PwC

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5 Please note that all legislative references refer to the Taxes Consolidation Act 1997 as amended, unless otherwise stated. 1. Ideas for you and your client to discuss Later in this presentation, I will go through some detailed tax cashflow management ideas which could be discussed with your clients. To start off the presentation, however, I would like to briefly focus on some other topical ideas which couid also be raised with clients. Group Tidy Ups In an increasingly competitive environment, most firms continue to experience pushback from clients on compliance fees. On many groups, we can spend time filling out nil corporation tax returns and the cost of doing so is often not recoverable for our firms. From the client's perspective, in addition to tax filing fees, the existence of dormant companies in the group also gives rise to ongoing compliance costs such as audit fees, company secretarial fees and Companies Registration Office filing fees. As both a cost reduction measure for our clients and our firms, one approach to this issue might be to consider the strike-off or liquidation of a number of dormant companies in a group. While this gives rise to a once-off cost for the client, it should result in yearly savings into the future. There can be a significant amount of work involved in preparing a company for strike off/liquidation. Prior to placing a company into liquidation/strike-off, the balance sheet will need to be cleared out. From a tax perspective, it is important to ensure that the tax implications of the write down or forgiveness of any intercompany or loan balances are considered. In order to determine the tax treatment of the write-off/forgiveness of an inter-company loan, it will firstly be important to establish the underlying reason for the advancement of the loan. Where a company provided a loan to another group company and it is clear that this loan is capital in nature, any forgiveness of this loan should not be taxable in the hands of the recipient company on the basis that the loan was capital in nature and is the release of a liability. Equally, the group company that forgave the loan would not be entitled to a corporation tax deduction for the amount forgiven.

6 Where an inter-company balance arises out of normal trading activities; i.e. where one group company provides goods or services to another group company, the release of such a loan balance is likely to be a taxable receipt in the hands of the recipient company. However, the group company that released the loan may not be entitled to a corporation tax deduction for the amount forgiven. It is often the case, however, that loan balances will have built up over a number of years and there is little documentation/details available in relation to the original purpose of the loan or on what the proceeds of the loan were used for; i.e. it is unclear as to whether the loan is capital or revenue in nature. In this scenario, the tax implications of forgiving such a loan may not be clearcut. Two approaches for dealing with such a scenario include: Making a submission to Revenue seeking their approval that such loans can be waived without giving rise to a tax charge or a tax benefit for the companies concerned. The submissions would typically explain the background circumstances and highlight the fact that there is little information available in relation to how the loans arose. Put a replacement loan in place. For example, A Ltd has an inter-company loan from another group company, X Ltd, in the amount of 1m and it is unclear as to what this balance relates to. A Ltd then borrows 1m from another group company, B Ltd, and use the funds to repay X Ltd. The inter-company balance between A Ltd and B Ltd is then waived/forgiven and the waiver should not be taxable in the hands of A Ltd (or deductible from B Ltd's perspective) on the basis that the replacement loan was capital in nature. Once the balance sheet has been cleared, there are various other legal and accounting steps which must be completed in the implementation of the strike-off/liquidation of a company. One of these steps includes the completion of all tax returns to date of cessation and seeking a letter of no objection from Revenue (in the case of a liquidation the liquidator will apply for the letter of no objection).

7 Rationalisation of Trades/Trade Transfers In many groups, it may now make more sense both commercially and from a cost reduction base to focus on rationalising the activities being carried on by the group into a smaller number of companies. For example, given the abolition of the exemption for both dividends and income earned directly from qualifying patent royalties in Finance Act 2011, there may not be any need to retain a separate patent royalty company in a group. Also, many companies may have historically carried on their 10% manufacturing activities in a standalone company separate to the other activities carried on by the group. From a tax perspective, this is no longer necessary post 31 December 2010 due to the abolition of manufacturing relief. In addition, in certain sectors of the economy, activity may have dropped off in respect of the activities carried on by certain distinct group companies such that it may now make more commercial sense to centralise all the activities into a smaller number of companies. There are certain taxation implications which need to be considered in relation to the transfer of various trades. I have provided a summary of the various issues in the table overleaf:

8 Summary of Tax Issues Arising on a Group Transfer of Trades Tax Head/ Issue Corporation Tax CGT VAT Stamp Duty PAYE Employment Regulations End of an Accounting Period Advances PT/ Crystallises Refunds Balancing Charges Relief S.312 Losses Carried Forward Preserved if same trade continued. S.400 CGT Charge Relief S.617 S % Withholding Tax If applicable, exemption via Form CG50A VAT Charge Relief S.20(2)(c) VAT Consol Act 2010 Stamp Duty Liability Relief S.79 SDCA 1999 Issue Forms P45 Exemption Confirm with Revenue in advance. Conform to Employment Regulations Give 30 days written notice to transferring employees.

9 Corporation Tax The disposal of a trade by a company to another would be deemed to be a discontinuance of that trade which would have taxation implications for the transferring company including the following: an accounting period for corporation tax purposes is deemed to have ended, the company will be subject to balancing allowances or charges on any assets on which capital allowances were claimed, and any trading losses would not be available to be carried forward against future trading income, in a non-group context Where a company ceases to trade, its accounting period is deemed to end for corporation tax purposes. The date on which these companies would be required to make preliminary tax payments and file their corporation tax returns would be dependent on the date the accounting period is deemed to end. S.312 provides that where a company transfers a trade to another company and one company has control over the other then it is possible to transfer the assets at their tax written down value. Therefore, on the transfer of fixed assets no balancing charge or allowance should have arisen to the companies whose trades were transferred and the asset would pass to the acquiring company at their tax written down values. Under Irish loss relief rules, trading losses are available to set against the future profits of that same trade for an unlimited period of time. Where a trade is deemed to have ceased the losses are no longer available for offset. However, S.400 also allows a company to succeed to the losses of a trade which has been transferred to it by another group company where there is at least 75% common ownership between the transferor and transferee companies. In order for this relief to apply to the transfer, the 75% common ownership condition must apply at any time within two years after the transfer of the trade and some time during the year preceding the transfer. Where this relief applies to a transfer, the transferee company will be entitled to utilise the losses forward of the transferor company but only against income of the trade that was formerly carried on by the transferor company. Therefore, the losses attaching to the trade transferred

10 may only be offset against the profits of the successor's trade that are attributable to the trade that has been transferred. Capital Gains Tax Irish companies are subject to Irish capital gains tax on the disposal of all chargeable assets located in Ireland. S.617 provides that where a member of a group of companies disposes of an asset to another member of that group, the transaction is treated as being for such consideration as would give rise to no gain/no loss on the disposal. A "group" in this case means a company and all its 75% subsidiaries. The required 75% relationship is determined based on the ownership of the ordinary share capital, entitlement to profits available for distribution and entitlement to the assets available for distribution on a winding-up. S. 980 provides for the deduction of an amount in respect of CGT - equal to 15% of the purchase price paid (where the purchase price exceeds 500,000) for certain specified assets (e.g. goodwill, land and buildings located in Ireland) - by the purchaser where a tax clearance certificate (Form CG50A) is not provided. Revenue recently clarified in Tax Briefing Issue 13 of December 2010 that in the case of transfers of assets to which S.617 applies, the consideration is deemed to be the original cost of acquiring the asset by the vendor company. In this scenario, the original acquisition price is to be regarded as the consideration for such transfers for the purposes of S.980 and, where this does not exceed 500,000, the requirement under that section to deduct 15% from the purchase price in respect of CGT or obtain a tax clearance certificate, does not apply. VAT Irish VAT rules (S.20(2)(c) VAT Consolidation Act 2010) specifically provide that the transfer of a business (or part of) by one VATable person to another VATable person does not constitute a supply of goods for Irish VAT purposes. In order to avail of the relief, it is best practice for both the transferor and transferee to be registered for VAT in advance of the transfer (as opposed to having a registration pending). Stamp Duty Irish stamp duty is chargeable on the transfer of any assets situated in Ireland. Where plant and machinery can transfer by delivery stamp duty may not arise. For other

11 stampable assets, it should be possible to relieve a stamp duty liability on the transfer by claiming associated companies relief (S.79 of Stamp Duties Consolidated Act 1999) on transfers within a group of companies. To claim associated companies relief a transferor must be entitled, either directly or indirectly, to not less than 90% of the transferee's ordinary share capital. In addition, the transferor must also be entitled to not less than 90% of the transferee's profits available for distribution and not less than 90% of the transferee's assets upon a winding-up. To avoid a clawback of the relief, the qualifying 90% relationship must be maintained between the companies for two years following the date of the transfer. In this regard, it is important to note that care is needed in respect of potential strike-off/liquidations of transferee companies. PAYE It should be possible to obtain agreement from Revenue that the transfer of the trade does not constitute a cessation of employment for the employees and accordingly, there should be no requirement to issue Forms P45. This confirmation should be requested from Revenue in advance of the transfer. Employment Regulations Under the European Communities (Safeguarding of Employees' Rights on Transfer of Undertakings) Regulations 2003, where a transfer of a business takes place, the employees involved should be advised of the date of the proposed transfer, the reasons for it, the legal, social and economic implications of the transfer for the employees and any measures envisaged by the transfer in relation to the employees. This can be done by way of letter to the individuals concerned if no change will take place in relation to the terms and conditions of their employment, however if any measures are envisaged by the transfer in relation to employees the employer is obliged to consult with the employees representatives in relation to same with a view to reaching agreement. There is a statutory requirement that the provision of information or consultation with the employees representatives (if required) must be carried out in good time but at least 30 days in advance of the transfer. Failure to do so can result in a penalty being applied to the company in the event that the employees take action against the company. There is no publication of companies which do not apply the provisions but obviously any such companies are leaving themselves open to potential employee claims to the Employment Appeals Tribunal. Hearings in relation to such claims are held in private but

12 the fact of a claim being taken against a particular company would be a matter of public record so reputational risk can follow. 2. R&D tax credits assisting your clients The R&D tax credit regime (S.766 & S.766A) is one of the key cornerstones of Irish smart economic policy (along with the introduction of capital allowances for the acquisition of certain intellectual property under S.291A) and is designed to encourage investment in R&D by companies in Ireland. I am aware that most people here have an awareness of at least the main benefits of the R&D credit, which includes an effective 37.5% tax deduction (25% credit in addition to a 12.5% corporation tax deduction) in respect of qualifying R&D expenditure and the possibility of obtaining a cash refund of the R&D credit over a three year period where insufficient corporate tax liabilities exist to utilise the credit. In this presentation, I intend to focus on some of the key practical aspects of the regime, in particular relating to what constitutes qualifying R&D expenditure and examples of where we commonly see qualifying R&D expenditure incurred in practice. I will also refer to the order of the utilisation of the credit in addition to the Revenue Guidelines regarding the format of backup documentation which should be prepared by clients making a claim for the R&D credit. I understand that Peadar Andrews will also refer to the R&D credit during his presentation and will share some of the key practical challenges experienced in industry in respect of making a successful claim for the R&D tax credit, in addition to focusing on some of the areas of the regime where scope for improvement may exist. Research & Development Activities The R&D credit provides tax relief for companies that incur expenditure, wholly and exclusively, in the carrying on by it of research & development activities as defined within S.766. Revenue Guidelines state that qualifying R&D activities must satisfy all of the following conditions. They must be: Systematic, investigative or experimental activities

13 o Revenue R&D Guidelines; it is expected that activities be to a planned logical sequence, generally to a recognised methodology, with detailed records being maintained In a field of science or technology o Natural, Engineering & Technology, Medical, Agricultural One or more of the following categories of research and development: o Basic research, o Applied research, or o Experimental development. In addition they must: Seek to achieve scientific or technological advancement, and Involve the resolution of scientific or technological uncertainty. In essence, R&D takes place when: There are activities That seek to achieve an advance in science or technology In a systematic investigative or experimental manner The resolution of scientific or technological uncertainty Categories of research Basic research - acquisition of knowledge without a specific practical application in view; Applied research - gain knowledge directed towards a specific practical application; Experimental development - draws on existing scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and is directed at producing new or improved products, materials, processes, etc. It may come as a surprise that, in reality, a significant number of companies may be currently carrying on qualifying R&D activities. At first glance, the concept and definition of R&D may appear quite scientific and technological, therefore a risk exists that many

14 companies may assume that the activities they are carrying out (for example, on improving their existing manufacturing processes) would not be in the nature of qualifying R&D expenditure for the purposes of the R&D tax credit. In reality, while qualifying expenditure within both the basic and applied research categories may be more restrictive and more limited from an Irish perspective (more in the nature of blue sky research), a significant number of companies may be carrying on qualifying R&D activities within the experimental development category. As a result, we find that most companies availing of the R&D credit in Ireland carry out activities in the experimental development category as opposed to either the basic or applied research categories. Examples of such experimental development could include: Creating a new process, material device or product Improvement to existing products Design and prototype build Appreciable improvement to an existing process; e.g. cost, reliability, reproducibility Duplicating an existing process or technology in a new way Scientific or technological advancement Revenue R&D Guidelines state that scientific or technological advancement should be measured by reference to overall knowledge in the relevant field of science or technology, rather than the company s own level of knowledge. However, the overall level of knowledge should be measured by reference to knowledge or capability reasonably available to the company or to a competent professional working in the field. Where knowledge of an advance in science or technology is not reasonably available, for example, where it has not been published, is not in the public domain or it is a trade secret of a competitor, companies would not be disqualified from claiming the credit where they undertake activities seeking to independently achieve the same scientific or technological advancement. A scientific or technological uncertainty may exist for one company although a competitor has resolved that uncertainty but retained the resulting knowledge as a trade secret or proprietary information. However, if the solution to a scientific or technological uncertainty is reasonably available to a competent professional working in the field, lack of knowledge by a company due to lack of diligence in seeking

15 that solution or lack of appropriate expertise within the company does not constitute scientific or technological uncertainty. It is also important to note that the R&D activity must only seek to achieve such advancement, and thus it is not necessary that a company must be successful in its R&D activities in order to qualify for the R&D credit. Even if the advance in science or technology sought by a project is not achieved or not fully realized or even a complete failure, R&D can still take place. For example, a particular R&D activity may cease or radically change if the advance originally sought becomes available from a scientific journal or newly published patent. Resolution of a scientific or technological uncertainty Scientific or technological uncertainty arises in two situations viz: uncertainty as to whether a particular goal can be achieved or uncertainty (from a scientific or technological perspective) in relation to alternative methods that will meet desired cost or other specifications such as reliability or reproducibility. The resolution of a scientific or technological uncertainty is a key condition of the R&D credit. For example, in the case of process development in a manufacturing industry, scientific or technological uncertainty could be resolved by swapping materials used in the production of a product. If, on the basis of reasonably available scientific or technological knowledge or experience such technological or scientific uncertainty exists, R&D activity would aim to remove that uncertainty through systematic, investigative or experimental activity. Uncertainty as to whether new materials, products, devices, processes, systems or services will be commercially viable is not scientific or technological uncertainty. A scientific advance always resolves uncertainty. Key Questions to be Considered What was the aim/goal of the project? Was information generally available & used in normal field? Were you told what to do and how to do it or just what result was required? Did you know the answer before you started?

16 Have you a result at the end of the project? Have you resolved something? Other Key Conditions Amount of credit is based upon incremental spend - i.e. excess of R&D expenditure incurred in year of claim over the amount of R&D expenditure in the base year (2003). All expenditure must be incurred in European Economic Area (EEA) and the claimant company cannot be entitled to any other tax relief in another State. R&D expenditure should qualify for relief even though it may be brought into account for accounting purposes in determining the value of an asset. Interest costs are not regarded as qualifying expenditure even though for accounting purposes such costs may be included in the value of an asset. Finance Act 2011 provides that a R&D tax credit may not be claimed on expenditure incurred on the provision of a specified intangible asset within the meaning of S.291A. Any expenditure which is met directly or indirectly by any grant from the State, any board established by statute, any public or local authority or any other agency of the State will not qualify for relief. Where certain activities are subcontracted to Universities/Institutes (EEA) or other unconnected persons (EEA or non-eea), relief may be restricted to 5% or 10% respectively of the expenditure incurred by the company itself on R&D activities. Subcontracted activities (including contract staff) is an area of keen Revenue focus in auditing R&D tax credit claims. A claim for the R&D credit must be made within 12 months from the end of the accounting period in which the expenditure was incurred. Expenditure on Buildings or Structures Used for R&D Activities S.766A provides that companies can claim R&D credits for expenditure incurred on the construction or refurbishment of buildings or structures used for R&D purposes. Credit for 25% of the relevant expenditure is granted in the year the expenditure is incurred. In order to qualify for R&D credits;

17 the company must be entitled to claim industrial buildings allowances on the building, and over a period of four years at least 35% of all the activities carried in the building must be R&D related. In cases where the entire building is not used entirely for R&D purposes, the R&D credit is only available in respect of the portion of the building that is used for R&D purposes. Credit is clawed back if, within 10 years of the accounting period for which a credit is claimed, the building or structure is sold or commences to be used for purposes other than the carrying on by the company of R&D activities. Any claim for an R&D credit on buildings or structures must be made within 12 months from the end of the relevant accounting period in which the relevant expenditure is incurred (as opposed to when brought into use). Order of Utilisation The order of utilisation of the R&D credit is set out below. 1. Credit is first offset against the corporation tax liability (if any) of the company for the period in which the expenditure is incurred (i.e. 2011). 2. Any excess R&D credit which cannot be fully utilised against the current year corporation tax liability (i.e. the R&D credit is in excess of the 2011 corporation tax liability) can be carried back and used against the corporation tax liability of the prior period of equal length to the accounting period in which the expenditure was incurred (i.e. 2010). 3. In circumstances where a company has made claims 1) and 2) above and the company has not fully utilised its R&D credit, the company may now make a claim to have the excess R&D credit refunded to the company in a maximum of three instalments. The first refund of the excess R&D credit will equal 33% of the excess and is refundable after the due date for the filing of the corporation tax return for the period to which the credit relates (i.e. 2011).

18 4. The remaining 2/3 of the R&D credit is carried forward to the subsequent accounting period (i.e. 2012) and used to offset against the company s corporation tax liability for that period. 5. If after claim 4 an excess of the R&D credit remains (i.e. a revised excess), the company can make a claim to have 50% of this revised excess refunded to the company. Such an amount is refundable after the due date for the filing of the corporation tax return for the period subsequent to which the credit relates (i.e. 2012). 6. The remaining 50% of the revised excess is carried forward to the next accounting period (i.e. 2013) and used to offset against the company s corporation tax liability for that period. 7. If after claim 6 an excess of the revised excess remains, the company can make a claim to have this amount refunded to the company. Such an amount is refundable after the due date for the filing of the second corporation tax return due after the return required for the period to which the credit relates (i.e. 2013). S.766(4B) imposes a limit on the amount of an R&D credit that is refundable to a company to the greater of the following: The total corporation tax payable by the company for all accounting periods in the 10 years preceding the period in which the R&D credit refund is claimed, or The total PAYE/PRSI liability that the company was required to remit for the period in which the company incurred the expenditure to which the R&D credit claim relates. Format of Supporting Documentation A claim for an R&D tax credit involves identifying and documenting qualifying R&D activities and associated qualifying expenditure in a manner that meets the strict requirements of the legislation and Revenue Guidance. There are essentially 4 stages involved in preparing a R&D tax credit claim: Feasibility study

19 Detailed preparation of claim/documentation Submit claim (i.e. complete Panel 9 of Form CT1) Audit preparation/support Recent practice has been for Revenue to audit a high percentage of R&D tax credit claims. As a result, all claims should be prepared on the basis that they should be expected to withstand a rigorous Revenue audit. Revenue audits are generally in one of two formats; either an audit of the relevant financials used in preparing a claim (can be either a desk or field audit) or an audit of the technological and scientific basis behind the claim or an audit of both. In respect of the technological/scientific audit, Revenue may employ the services of specialists from the relevant field of science or technology to audit whether scientific or technological advancement has been achieved and scientific and technological uncertainty has been resolved. Please note that it is also possible in certain circumstances to seek an advance ruling from Revenue to confirm whether certain activities are qualifying R&D for the purposes of the R&D tax credit. While R&D activities may be at the forefront of the minds of most companies, preparing the associated documentation to support a R&D tax credit claim for these activities in the manner prescribed by Revenue may not be. An opportunity exists for tax advisors to assist companies in preparing the documentation to support a claim. First of all, in assisting a client to prepare an R&D claim, tax advisors should consider who would be best placed within the organization to be the main point of contact. It may be that staff operating within the R&D/operational/manufacturing function may have a better idea of what is happening on the ground as opposed to staff from the finance function (in particular in determining whether scientific or technological advancement has been achieved and scientific and technological uncertainty has been resolved). When preparing the documentation it is important to get the balance right in the language used. The language in the documentation will need to understandable from the perspective of a non-scientific specialist but it will also need to clearly demonstrate the scientific advancement and resolution achieved. Revenue ebrief 02/2009 set out the specific information to be submitted to convert a protective claim into a valid claim. Revenue use the detail outlined in the ebrief as a checklist when auditing the documentation supporting an R&D claim. Therefore, when supplying the required information, it is recommended that the information should:

20 be set out in the following precise order; be numbered accordingly; and include separate information in relation to each project. Revenue ebrief 02/2009 The information to be provided is as follows: 1. The field of science and technology concerned. 2. A detailed description of: The research and development activities, The methods used (i.e. the systematic investigative or experimental activities within the given field of science and technology). This must include details of the series of experiments or investigations undertaken to test the hypothesis. The objective of the research and development. 3. The specific scientific or technological advancement that the company sought to achieve. 4. The specific scientific and technological uncertainty the company sought to resolve by those activities. 5. The date the research and development activity began. 6. The date the research and development activity ended, or state if it is still ongoing. 7. Amount of R&D expenditure (if any) paid to a university or institute, or to external subcontractors. 8. The amount and type of any grants received. 9. The qualifications, skill and experience of the project manager. 10. The numbers, qualifications and skill levels of other personnel working on the project.

21 11. A separate itemized analysis of qualifying cost for each accounting period in relation to each project. 12. Where cost has been attributed to research and development activities by apportionment of a greater cost, the method of and basis for such apportionment must be disclosed. 13. The computation of the tax credit claimed in respect of each accounting period, showing clearly the threshold amount. 3. Tax and cashflow management Cash is king at the moment all clients are under pressure in terms of cashflow. Cashflow is of relevance no matter how well or how badly clients are performing due to the fact that securing finance is proving very difficult. Organisations are themselves striving to improve cashflow management by numerous methods, including prompt billing, creating incentives for faster payment, trimming inventory, refinancing debt and interest payments, etc. Accordingly, any way to save cash or improve cashflow is likely to be very much welcomed by clients. Opportunities exist for tax advisors to assist their clients in cashflow management by: generating tax refunds by maximising the utilisation of losses, minimising or deferring existing tax liabilities, and preserving the tax benefit of existing structures for offset against future profits. In this presentation, I propose to outline some practical ideas that may be of relevance in improving a company s tax cashflow position. Tax efficient use of losses During the Celtic Tiger years, the existence of losses rather than profits would have been the exception rather than the rule for many clients. Given the current difficult economic conditions, losses have become much more prevalent. The tax-efficient utilisation of losses can lead to significant cash tax refunds for our clients.

22 At a basic level, S.396A and S.396B allow for corporate losses to be carried back to a period equal in length to the period in which the loss has occurred. Therefore, where a company is loss making in the current year, but was profitable in the prior year and paid corporation tax, it may be possible to carry back those losses and obtain a refund of the corporation tax paid in the previous period. Please note that any carry back of losses to a previous accounting period has to be made within 2 years from the end of the accounting period in which the loss is incurred. The use of losses in group situations can be complex and it is perhaps the case that losses are not optimised. Example 1 - Use group losses to preserve own losses It may be more beneficial for a company to take in group relief to shelter own non-trading profits preserves own trading losses to be carried forward against future trading income. Relevant where own company expected to produce trading profits in near future whereas other group companies are not expected to be profitable. A Ltd B Ltd Trading Losses ( 2m) ( 2m) Passive Income 1m Nil A Ltd and B Ltd are members of the same group. A Ltd has historically been profit-making but incurred 2m of trading losses in the current year. It is expected to return to profitability soon. B Ltd is loss-making for the current period - 2m of losses. It has historically made losses or very small profits. It is expected to be loss-making in the future. A Ltd has taxable passive income of 1m. Instead of making a S.396B claim for its own current year losses, trading losses of 2m are carried forward in A Ltd to shelter future trading income (profits are expected to arise in the future). Losses of 2m are claimed by A Ltd from B Ltd under S.420B to shelter the passive income in A Ltd. No trading losses are carried forward in B Ltd (where no profits are expected to arise).

23 Example 2 Allocation & Re-allocation of group losses Re-allocation of prior year group relief arrangements can provide beneficial results when current year losses are being thrown back. Relevant for all companies and groups making S.396A and S.396B claims against prior year income or profits A Ltd B Ltd C Ltd Trading profits/losses 3m 3m ( 3m) Passive Income 1m 1m 0 S.420A claim from C Ltd ( 3m) 2010 A Ltd B Ltd C Ltd Trading profits/losses ( 3m) 1m ( 1m) Passive Income In 2009, S.420A claim made by A Ltd for C Ltd s losses. In 2010, Re-allocation of 2009 losses move claim for C Ltd s losses of 3m from A Ltd to B Ltd. Make S.396A claim against PY trading income in A Ltd (using its own 2010 losses). S.420A claim made by B Ltd for C Ltd s losses. Re-allocation enables refund to be obtained in 2010 in respect of 3m trading profits in B Ltd earned in 2009; If no re-allocation is made, no refund is obtained and losses are carried forward in A Ltd. Planning your Preliminary Tax Payment As you may be aware, small companies (prior year corporation tax liability is less than 200,000) can choose to make their preliminary corporation tax payment in accordance with either: 90% of the final liability of the current accounting period; or 100% of the final liability of the previous accounting period.

24 All other companies must pay two instalments of preliminary tax with the option for the first instalment being either: 45% of the final liability of the current accounting period; or 50% of the final liability of the previous accounting period. In the current economic climate, profits of companies, and consequently the tax liability, may be falling year on year. In such circumstances, there may be a cashflow advantage on basing the preliminary corporation tax payment on the current year estimated liability as opposed to basing it on the prior year liability. In adopting this approach, it would be important to consider the potential variance in the current year estimates and the risk of interest charges arising in the event of an underpayment. Tax Exemption for New Trades (S.486C) Finance Act 2011 extended this regime to trades that commence in Exemption is available on trading income and gains on assets used for the purposes of the trade and is available for a period of 3 years from the commencement of the new trade, provided the corporation tax liability arising is less than 40,000 per annum. Marginal relief exists where the corporation tax liability is greater than 40,000 but less than 60,000. A company taking over an existing trade, or part of a trade, which was previously carried on in the State by another person will not qualify for the start up exemption while the exemption is also not available for closely held service companies or trades liable to corporation tax at the 25% rate. A company seeking to claim the start-up exemption must elect to claim such relief in its corporation tax return for the period to which the relief applies. Finance Act 2011 also amended the relief to link the amount of relief available, to the amount of employer s PRSI paid by a company in an accounting period subject to a maximum of 5,000 per employee. Where the amount of qualifying employers PRSI is lower than the reduction in corporation tax, relief will only be available at that lower amount. No aggregation limit applies for group purposes. Therefore, clients could consider putting new business ventures (must be activities of a separate nature to activities

25 carried on by existing group companies; e.g. a completely different trade Finance Act 2011) into a separate new company rather than into an existing company and avail of a potential tax saving of up to 120k over 3 years. Miscellaneous Corporation Tax Cashflow Ideas There are various other corporation tax cashflow ideas which I do not propose to go in to detail about today. I have outlined some of these ideas below for information purposes only: Reviewing section 247 interest payments o Acceleration or deferral of relief. Capital allowances review o Review items on which capital allowances not previously claimed. o Perhaps some items capitalised in the accounts are in fact revenue in nature. Professional Services Withholding Tax interim refund o Possible in some cases. o Especially relevant where prior year tax liability was nil/small as this should result in a large interim refund. o PSWT deductions can also be used as a payment on account for preliminary tax purposes. Deferral of Balancing charges Replacement Option S.290 o Balancing charge is deducted from qualifying cost of replacement plant or machinery. Reduce Interest income o Restructure underlying funds giving rise to interest income via dividend to foreign parent or lend interest free. Ensure declaration is made to bank/building society to receive interest gross, without deduction of DIRT Miscellaneous VAT Cashflow Ideas VAT is a particularly large cashflow issue for clients and is relevant regardless of whether or not a company is in profits or losses. I do not propose to go in to detail about VAT Cashflow ideas today but I have outlined some ideas for information purposes below:

26 Cash Receipts v Invoice Basis of Accounting o Relevant if turnover does not exceed 1m or at least 90% of customers are unregistered persons (e.g. hospitals, private individuals, etc.). o Only obliged to remit VAT once the funds have actually been paid by the customer. o Potential source of major cashflow savings. Bad Debt Relief o Reclaim the output VAT charged on debts which are now written off. o Certain conditions must be met. o 4 year refund claim possible for clients not aware of this. Date of Issue of Invoices o Invoice issued 31/08/11 means VAT payable 15/09/11. o Invoice issued 01/09/11 means VAT payable 15/11/11. o Please note VAT legislation provides that invoices should be raised by the 15 th day of the month following the month in which the supply is made. Issue Pro-Forma invoices for supplies of continuous services o Issue pro-forma invoices in order to defer the VAT liability until payment of account has been received. o Relevant for clients who are supplying customers over a protracted period of time contracts based businesses. Deposits & Cancellation Charges o If customer cancels order and deposit not refunded (or cancellation charge imposed), client may reclaim the VAT previously accounted for. o Relevant to hotels, restaurants, physiotherapists, etc. VAT recovery on vehicles o Recover 20% of VAT incurred on purchase, hiring or intra-community acquisition or importation of a qualifying vehicle used primarily (at least 60%) for business purposes. o Qualifying vehicle is a motor vehicle first registered on or after 1 January 2009 and has emissions of less than 156g/kg. VAT 13B Status o Applicable where at least 75% of a business s turnover relates to supplies of goods outside the State.

27 o Qualifying for VAT13B status ensures that the business does not incur VAT on its purchases (other than on non-deductible costs). Avoids time delay of reclaiming the VAT in the normal manner. Miscellaneous PAYE/PRSI Cashflow Ideas The area of PAYE & PRSI is a significant cashflow area for almost all clients. The monthly outflows tend to be quite large and, therefore, any small changes in this area could avoid a negative cashflow position for clients. For information purposes, I have briefly outlined below some PAYE/PRSI cashflow ideas. While the cashflow planning ideas suggested in relation to PAYE & PRSI might appear somewhat basic, it is surprising the number of clients which may not be fully benefitting from them: Use Direct Debit system where fluctuating PAYE liabilities arise o Can allow a business to spread the total PAYE/PRSI liability evenly over a 12 month calendar period. o Particularly relevant where business is seasonal in nature. o Care needed as interest can arise on any outstanding balance at the end of the year that exceeds 10% of the total liability for the year. Offset of Statutory Redundancy rebates o Entitled to reclaim 60% of statutory redundancy costs from the Department of Enterprise Trade & Employment. o In practice, refunds can be slow to issue. o Revenue have introduced a procedure to allow businesses to offset this refund due against any outstanding PAYE/PRSI liability where the delay is causing financial difficulty for a business. Small & Irregular Benefits Settlement o Elect to meet the tax costs of minor benefits provided to employees under the small and irregular benefits settlement provisions rather than grossing up the tax cost in the next payroll run. o E.g. for benefits provided in January 2011, the due date for payment of any tax liability would be 15 February Vouchers not exceeding 250 o Employers are entitled to provide voucher to staff members with a value not exceeding 250.

28 o Only one voucher per year two vouchers for 125 a year cannot be provided. 4. Mandatory e-filing and other electronic updates Mandatory electronic payments and filing, using Revenue's Online Service (ROS), is part of Revenue's strategy to establish the use of electronic channels as the normal way of conducting tax business. ROS is an internet facility which provides taxpayers a quick and secure facility to pay tax liabilities, file tax returns, access their tax details and claim repayments. The ROS facilities are available 24 hours a day, 7 days a week, 365 days a year. Taxpayers can benefit from an extension to existing deadlines for paying tax and filing returns where they both pay and file using ROS. The existing time limits have been extended to the 23rd of the month for Corporation Tax, Relevant Contracts Tax, VAT and Employer PAYE/PRSI. Other potential advantages to clients availing of e-filing include improved customer service, faster turn-around time, improved accuracy and audit trail, and reduced processing costs. Mandatory e-filing is being introduced over different phases. Phase 1 1 st January 2009 o All taxpayers whose tax affairs are dealt with by Large Cases Division and all Government Departments Phase 2 1 st January 2010 o All companies with a turnover of more that 7.3m and with more than 50 employees and all public bodies. Phase 3A 1 st June 2011 o All companies o All trusts o All partnerships o Self-employed individuals filing a return of payments to third parties (Form 46G) o Self-employed individuals subject to the high earners restriction (Form RR1, Form 11) o Self-employed individuals benefiting from or acquiring Foreign Life Policies, Offshore Funds or other Offshore products

29 o Self-employed individuals claiming a range of property based incentives (Residential Property and Industrial Buildings Allowances) o All Stamp Duty returns Phase 3B 1 st October 2011 o All Sole Traders with 10 or more employees, not already covered in Phase 3A Phases 4 & 5 TBC o Precise timing and scope of Phases 4 and 5 will be the subject of separate communication by Revenue in the coming months. A comprehensive list of all Specified Returns and Specified Tax Liabilities that must be paid and filed on ROS are outlined on the Revenue website. It is important to note that it generally takes a few weeks for Revenue to process a ROS registration. If Revenue are satisfied that a person or business does not have the technological capacity to file online, they may exclude them from the e-filing requirement. For more information, see the Revenue s ebrief 04/11 and ebrief 32/ Looking to Export? Tips and traps for clients to be aware of Foreign activities are part and parcel of the business profile of many Irish headquartered groups and success in export markets is crucial to the long-term growth of Irish businesses and the Irish economy. Tax risks increase as operations expand overseas. This can be due to: Different territories and tax laws Different cultures/ways of doing business Different languages Lack of communication and information/different time zones Different Revenue procedures & expectations As tax advisors, we can provide support to businesses exporting from Ireland by providing an awareness of the taxes and procedures for transporting and importing goods into each country with which they do business, in addition to identifying potential tax incentives and opportunities for exporters. Amongst the key issues faced by Irish exporters include:

30 What business model to adopt with respect to foreign activities/maximising the 12.5% Irish tax rate Financing of foreign activities Profit repatriation and cash repatriation strategies (where applicable) Business Modelling/Maximising the 12.5% tax rate As a starting point, the 12.5% corporate tax rate in Ireland offers a potential significant competitive advantage to Irish exporters. The first rule for Irish exporters should be to aim to avoid creating an overseas tax presence and thereby enable all profits to be subject to taxation at the 12.5% Irish rate. The second rule is that if the first rule is not achievable, Irish exporters should recognise this fact early and plan to minimise profits attributable to overseas operations. If a permanent establishment is likely to exist, a decision will need to be made as to whether to trade through a branch of an existing Irish company or establish a new foreign subsidiary. If losses are expected in the early years, using a branch may be beneficial as losses of a branch can be offset against Irish taxable profits and can also be carried forward in the branch. The commercial drivers of the business will clearly determine the business model ultimately adopted. The objective from a tax perspective is to seek to ensure that the client s specific business model designed to achieve the commercial objectives also results in a significant proportion of the profits from the foreign activities accruing in Ireland. A business model should be adopted that enables a shield to be created around the profits allocated to the Irish headquarters (e.g. retain key executives and decision makers in Ireland, have overseas business risks managed by the Irish operations, use limited risk distributors in foreign territories). Transfer pricing is a key element here and I understand that Peadar will address this issue in further detail during his presentation. Financing / Profit & Cash Repatriation The establishment of overseas operations will require a tax efficient financing structure to be put in place which should seek to achieve some of the following: A tax deduction in Ireland where the parent funds the expansion with increased borrowings