Tax Update on Current Tax Developments

July 31, 2013

Criticisms of Irish Corporation Tax Regime

Ireland’s corporation tax regime has come under much criticism from two sides in recent times. On the one side, the UK’s spending watchdog, the Public Accounts Committee, has called on HM Revenue and Customs to investigate Google due to the fact that although it generated sales of $18 billion in Britain in the period 2006 to 2011 paid only $1 million in taxes. It has been claimed the low bill is as a result of channelling revenues through Ireland to Bermuda without any tax being paid anywhere on the profits. On the other side, the US House of Representatives Ways and Means Committee has been told that US multinationals such as Apple have created “stateless income” by shifting profits to countries where they have to pay little or no taxes. Specific reference was made to a 2% rate of tax paid by Apple in Ireland. The Committee has been advised that as a result of cost sharing agreements between Apple companies in Ireland and the US, profits have been siphoned off to jurisdictions where no tax is paid. In this context, Apple’s Irish holding company has been described as a “meaningless operation”.

There is nothing wrong with the Irish tax system. Ireland is not doing anything that encourages tax evasion or avoidance. Ireland’s method of determining whether a company is within the charge to tax based on whether it is managed and controlled in Ireland is the same basis used by its many tax treaty partner countries and has been accordingly approved by the OECD. It is also standard practice in such countries that a company would be entitled to a tax deduction for royalty payments made and that royalties paid in respect of foreign patents would not be within the charge to tax in the paying country. The only difference between Ireland and its tax treaty partners is the 12.5% corporation tax rate. Compared with a US effective corporate tax rate of up to 40% one can see why US multinationals might prefer to locate outside the US.

However, while Ireland may not be doing anything wrong, there is increasing pressure internationally for matters to change. The OECD report on base erosion, published in February, stated that one-man intellectual property companies which hold very valuable intellectual property are not sustainable if the company does not have the ability to maintain or enhance those rights. Changes in this area could suit Ireland, as multinationals may transfer Intellectual Property from Bermuda to Ireland to meet substantive tests. The declaration issued at the end of the recent G8 summit stated that countries should change rules that let companies shift their profits across borders to avoid taxes and that tax authorities across the world should automatically share information to fight tax evasion. The amount of tax payable by multi-nationals is under scrutiny and because of this increased scrutiny it is likely that measures will be put in place in the future to counteract current structures undertaken in order to minimise or eliminate tax liabilities as suggested in the most recent OECD Report.

PRSI and Shareholders

Practitioners will be aware that Scope Section of the Department of Social Protection had not been responding to requests seeking determinations on the correct PRSI class to apply to proprietary directors. The Department had indicated that following recent legal challenges it had been examining the position and had suspended the issue of determinations.

S.12 of the Social Welfare Consolidation Act 2005 (SWCA) provides that every person who is over age 16 and less than pensionable age who is employed in an employment specified in Pt 1 of Sch 1 of the SWCA (other than persons employed in an “excepted employment”) is an “employed contributor” i.e. liable for PRSI as an employee rather than as a self-employed person. The SWCA lists out the employments in which a person will be regarded as an employed contributor. This includes an employment in the State under a “contract of service”. Thus a person is an employed contributor if they are employed under a “contract of service” unless their employment is an excepted employment set out in Pt 2 of Sch 1.

In the case of employees who are also shareholders in the company by which they are employed it is not always clear whether the individual is employed under a “contract of service”. Whether an individual is employed under a “contract of service” (employee) or “contract for services” (self-employed) is not defined in legislation and had been the subject of a lot of case law. Factors which were considered key in determining whether a contract of service or for services existed were, for example, whether the individual was under the control of the “employer”, whether the individual was in a position to profit from the management of the work, whether he had any financial risk and generally whether the individual could be regarded as being in business for himself or not. In the case of employees/directors with a controlling interest in the company it could be argued that because of their ability to control the company by working for the company they were in effect working for themselves and could not therefore be employed under a contract of services. The practice adopted by Scope Section was to regard any director with a majority shareholding as not employed under a contract of service and insurable under Class S instead of as an employee.

However, recent case law determined that it was possible for a director with a controlling interest to be employed under a contract of service (Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld and Howe (2009) EWCA Civ 280 CA). The fact that an employee is a controlling shareholder is only one factor which must be taken into account in determining whether such an employee has a contract of service. In determining whether an individual is in employment under a contract of service each case must be determined in the light of its particular facts and circumstances (Henry Denny and Sons (Ireland) Ltd. v. Minister for Social Welfare [1998] 1 I.R. 34), (Neenan Travel Ltd v Minister for Social and Family Affairs (2011 IEHC 458)).

It had been expected that updated guidance on the position would be published. Further guidance has not been issued. However, the Social Welfare and Pensions (Miscellaneous Provisions) Bill 2013 which was recently published, puts on a statutory basis the previous practice of Scope Section regarding the status of directors who are also controlling shareholders.

At the moment the types of employments set out in Pt 2 of Sch 1 as being excepted employments, and so not insurable as employees, are employments by a spouse, certain employments by close relatives, subsidiary employments or employments below a certain minimum wage and certain Fás employment schemes. S.12 of the Social Welfare and Pensions (Miscellaneous Provisions) Bill 2013 proposes to add to the list of excepted employments in Pt 2 of Sch 1 an employment in the State under a written or oral contract of service where the employed person is either:

  • (a) the beneficial owner of the company or
  • (b) is able to control 50% or more of the ordinary share capital of the company, either directly or through the medium of other companies or by any indirect means.

In certain circumstances persons in employment at the time of the passing of the Act may elect that the new provisions shall not apply to his or her employment.

The PRSI status of employees with a shareholding of 50% or less or of spouses of a shareholder with a controlling interest has not been changed by the Bill. The PRSI status of such employees will be dependent on whether they are deemed to have a contract of service with the company. Whether or not an employee has a contract of service with a company will depend on the circumstances and facts of the particular case.

Employment and Investment Incentive Scheme

The Employment and Investment Incentive Scheme (EII Scheme) replaced the BES with effect for shares issued on or after 25 November 2011. There are a lot of similarities between the EII scheme and the BES it replaced. The main differences between the two are as follows:

  • Only manufacturing companies or companies involved in certain tourism or internationally traded services could raise funds under the BES. A much broader range of companies can raise funds under the EII scheme
  • Companies can raise up to €10 million, subject to a maximum of €2.5 million in any one year, under the EII scheme. Under the BES, the limit was €2 million, with an annual limit of €1.5 million
  • The period for which the investment must be held is only 3 years under the EII scheme compared with 5 years under the BES
  • Under the EII scheme the initial tax relief given is 30% with a further 11% given at the end of the 3 year holding period provided certain conditions are satisfied. Under the BES, 41% tax relief was given when the investment was made
  • Certification procedures are more simplified under the EII scheme compared with the BES

Take up under the EII scheme has not been significant to date. It is not clear why this is the case but it is thought that the fact that full tax relief is not given up front may be a factor and also the shorter holding period may in fact be a disincentive as the period may not be long enough to allow the company to earn sufficient profits to repay the investors.

Revenue Annual Report for 2012

The Revenue recently issued their annual report for 2012. Some interesting facts which are contained in the report are as follows:

  • The overall number of audits completed in 2012 compared with 2011 has reduced by 18% (down from 11,066 to 9,066).
  • The number of non-audit interventions has also reduced down by 3% from 546,502 in 2011 to 528,755 in 2012.
  • While the reduction in the number of audits resulted in a corresponding reduction in the yield from audits there was an increase in the yield from non-audit interventions. Non-audit interventions will generally arise from risks identified by Revenue and the fact that the yield from non-audit interventions increased probably reflects more sophisticated electronic systems available to Revenue to risk profile taxpayers and identify generally discrepancies in data held by Revenue in respect of particular taxpayers.
  • 52% of all audits covered all tax heads. 29% were single tax audits.
  • Only 283 random audits were completed in 2012. Of these audits 69% resulted in no additional tax becoming payable.
  • The highest number of audits carried out in one particular sector was the construction sector. 14% of all audits in 2012 were in the construction sector.
  • As a result of the project undertaken by Revenue in 2012 to ensure that tax was being paid where it was due in respect of social welfare pensions it is estimated that an additional €65 million in tax was paid. This amount does not include arrears of tax. Initially Revenue contacted individuals with in excess of €50,000 non-social welfare income in order to collect arrears of tax. This resulted in additional tax paid of €10.9 million. Revenue are now dealing with individuals with income of over €30,000 in addition to their social welfare pensions.
  • Tax is still being collected under various legacy investigations (e.g. bogus non-resident accounts, offshore assets). In 2012, €30.69 million was collected bringing the cumulative amount collected under such investigations to €2,700 million.
  • There were 10 cases brought to the Circuit Court in 2012 of which 5 were won by Revenue, 1 by the taxpayer and 4 were settled.
  • There were 92 cases brought before the Appeal Commissioners in 2012 of which 40 were won by Revenue, 12 by the taxpayer, 2 were part successful by both parties and 38 were settled.
  • 87 out of 110 internal or joint internal external reviews carried out were found in favour of Revenue (79%). In only 15 cases (14%) was Revenue’s decision revised or partly revised as a result of the review. In the remainder (7%) of cases the request for a review was withdrawn by the taxpayer.
  • During 2012, a total of 48 Protective Notices were received under S.811A TCA 1997.
  • During 2012, 24 Notices of Opinion under S.811 TCA 1997 were issued.
  • During 2012, Revenue commenced a review of the tax affairs of “service companies” i.e. companies whose main business consists of a contract for service with a larger company and where generally the director(s) of the company are the only employees of the company. 24 cases investigated to date have yielded approximately €908,000.

Further Information

If you require any further information please contact:

Brian Purcell –  brian@pmqtax.com

This memorandum does not purport to provide comprehensive tax advice and no steps should be taken in reliance on these notes without first obtaining detailed tax advice.