A number of Revenue Guidance Documents have been introduced following Finance Act 2014 being signed into law on 23rd December 2014.
This article will be focusing on the following documents:
1. Transfer of a Business to a Company (Section 600 Taxes Consolidation Act 1997 Relief and Assumption of Business Debt) – eBrief no. 111/14 (24th December 2014)
Section 600 TCA 1997 provides that Capital Gains Tax on the transfer of a business and all its assets to a company may be deferred providing four conditions are met:
Any liabilities taken over are to be treated as cash consideration but in practice, Revenue may no enforce this rule in circumstances where:
Revenue has clarified in this eBrief that bona fide trade creditors will not be treated as other consideration for the transfer. By this, they mean genuine trade creditors who provide goods and/or services to the business.
The Revenue Concession does not apply to business debts such as bank loans or tax liabilities.
2. Deduction for Income Earned in Certain Foreign States (Foreign Earnings Deduction) – eBrief no. 106/14 (24th December 2014)
The Foreign Earnings Deduction (F.E.D.) was introduced in Finance Act 2012.
It was designed to encourage and incentivize individuals who perform their duties of employment in the specific countries Ireland was targeting for the purposes of business development and export growth.
In 2012 this tax relief applied to Irish resident employees who carried out significant duties in Brazil, Russia, Indian, China and South Africa.
From 2013 to 2014 the list of countries was extended to Egypt, Algeria, Senegal, Tanzania, Kenya, Nigeria, Ghana and the Democratic Republic of Congo.
According to this eBrief the number of relevant states now include: Japan, Singapore, South Korea, Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Indonesia, Vietnam, Thailand, Chile, Oman, Kuwait, Mexico and Malaysia.
Prior to Finance Act 2014 the rules for claiming the relief were as follows:
Employment Income x Qualifying Days
Finance Act 2014 introduced the following changes for the years 2015, 2016 and 2017:
By “Qualifying Day” we mean a day, the whole of which is spent in a relevant state for the purposes of carrying out the duties of an office or employment.
Other Points to Consider
a) Section 472D – Research and Development Credit
b) Section 825C – Special Assignee Relief Programme
c) Section 822 – Split Year Residence Relief
d) Section 825A – Relief for Income Earned outside the State.
3. Guidance on Compensation Payments under Section 2B of Employment Permits Act 2003 – eBrief no. 112/14 (24th December 2014)
The best starting point in relation to understanding the tax treatment of awards/settlements is Section 192(A) Taxes Consolidation Act 1997. It can be summarised as follows:
Now that we’ve established that the main distinction between a taxable award/settlement and a tax exempt award/settlement is the distinction between wages/salary and compensation, let’s look at Section 2B of the Employment Permits Act 2003. This piece of legislation was introduced to prevent or at least deter employers from employing foreign nationals without a valid employment permit.
How does it work?
It allows the foreign national to take a civil action against his/her employer for compensation in relation to work done or services carried out even if there is no legal contract in place.
As the compensation is not deemed to be for an infringement of a right, rather, it’s considered to be the reimbursement of a salary or wages then it is liable to tax.
The compensation is calculated by a court order based on a national minimum hourly rate of pay (or any rate of payment which is fixed under, or pursuant to, any enactment).
What is the tax treatment?
The tax treatment of these compensation payments is covered by two new provisions:
which were introduced by Section 37 of the Employment Permits (Amendment) Act 2014.
If compensation payments are made to individuals under Section 2B of the Employment Permits Act 2003 they are liable in full to PAYE and the Universal Social Charge.
They will not be liable to PRSI as they are not treated as “reckonable emoluments” as defined in the Social Welfare & Pensions Act 2012.
4. Guide to the Capital Acquisitions Tax Treatment of receipts by children from their parents for their support, maintenance or education – eBrief no. 109/14 (24th December 2014).
As you are all aware, Capital Acquisitions Tax is the tax levied on gifts and inheritances received by individuals where the value of the gift/inheritance exceeds that individual’s lifetime tax free threshold amount.
Section 82(2) of the Capital Acquisitions Tax Consolidation Act exempts from tax “normal and reasonable” payments (in money or monies worth) made by the disponer during his/her lifetime for the support, maintenance or education of his/her
While carrying out compliance programmes, the Revenue Commissioners identified ways in which this exemption was being abused. As a result, Section 81 Finance Act 2014 amended Section 82 Taxes Consolidation Act 1997 to ensure that where there is a need to provide for the support, maintenance and education of children the exemption is confined to the following:
So what do we mean by “normal and reasonable” payments?
Revenue’s view is that “normal” refers to the nature of the payment or expenditure. Examples include the payment of fees and accommodation costs for a dependant child attending college.
“Reasonable” refers to the financial circumstances of the disponer. Even though there is no ceiling on the value of what can be provided by way of maintenance or support, the exemption will not apply if the disponer makes payments which are disproportionate to his/her means.
Back to the eBrief:
Section 82(2) does not cover all payments by a parent to a child. Revenue does not accept that gifts to a child who is financially independent are exempt from Capital Acquisitions Tax nor does it accept that gifts of a capital nature are tax exempt.
Examples of non-exempt benefits/gifts/payments are as follows:
So what benefits/gifts/payments are tax exempt?
5. Relevant Contracts Tax – Revised Penalties from 1st January 2015 for the failure of a Principal Contractor to operate R.C.T. correctly on relevant payments to a contractor – eBrief no. 110/14 (24th December 2014)
Before we examine this guidance document, I will briefly explain the Relevant Contracts Tax system in Ireland.
What is Relevant Contracts Tax (R.C.T.)?
R.C.T. is a tax that applies to the following industries in Ireland:
R.C.T. applies to payments made by a Principal Contractor to a Subcontractor under a Relevant Contract i.e. a contract for a Subcontractor to carry out relevant operations for the Principal Contractor.
Important Points to Note:
So, how does this tax work?
Before 31st December 2011, the Principal Contractor was required to deduct withholding tax from the gross payments made to a Subcontractor under a relevant contract and submit this tax to the Irish Revenue Commissioners on the Subcontractor’s behalf. At the time there was only one rate and that was 35%.
The Principal provided the Subcontractor with a Certificate outlining the tax paid on his/her behalf (Form RCTDC 45) and the Subcontractor could then receive a credit or in some cases a refund of this tax withheld once he/she filed an annual Income Tax Return.
The Principal was required to file a monthly Return of tax deducted (RCT 30) and pay the relevant RCT deducted to Revenue. The Principal Contractor was also obliged to file an Annual Return of Gross Payments and Tax Withheld on an RCT 35 which had to be filed by 23rd February following the year end.
If, however, the Subcontractor had a Certificate of Authorisation or a C2, the Principal could pay the Subcontractor without deducting R.C.T.
On 1st January 2012 the rules changed with the introduction of three rates of withholding tax:
Back to eBrief 110/14
Section 17 Finance Act 2014 introduced a revised sanction for situations where the Principal Contractor fails to operate RCT on relevant payments to Subcontractors. The level of penalty will depend on the percentage of tax withheld from the Subcontractor’s payments.
From 1st January 2015 the Principal will be liable for the following penalties in the event of non operation of R.C.T.:
What about filing obligations?
In all the above four situations the Principal Contractor will be required to submit an Unreported Payment Notification to Revenue.
6. Capital Gains Tax – Finance Act 2014 – Vodafone Shareholders – eBrief no. 107/14 (24th December 2014).
On 14th May 2014 the Irish Revenue Authorities issued a detailed Tax Briefing outlining the tax treatment of the Vodafone Return of Value to its Shareholders. I wrote an Explanatory Blog, which was published on this site on 16th May 2014, outlining the comprehensive guidance on the calculation of the base cost for Capital Gains Tax purposes. In my Blog, I discussed the Income Tax Treatment for shareholders who opted for “C Shares”:
“individuals who opted for the ‘C Shares’ received a dividend from Vodafone which consisted of (a) a cash amount and (b) shares in Verizon.
The individual was then required to include both amounts in his/her annual Income Tax Return i.e. (a) the cash actually received and (b) the market value of the Verizon Consideration Share Entitlement received.
Income Tax, P.R.S.I. and the Universal Social Charge were then levied on this dividend.”
On 23rd December 2014 Revenue issued additional guidance on the tax treatment where Returns of Value of €1,000 or less were received by Vodafone shareholders. eBrief 107/14 contains details of a tax relieving measure which was introduced by Section 48 Finance Act 2014.
What is this Tax Relieving Provision?
Section 48 Finance Act 2014 allows individuals who received a “Return of Value” payment of €1,000 or less under the terms of the Return of Value to be treated as having received a Capital Sum which, if the individual had acquired the Vodafone shares as a result of originally investing in Eircom back in 1999, would result in a NIL Capital Gains Tax liability.
It should be noted that individuals can opt to have the payment treated as income should they wish in which case the payment sum would be liable to Income Tax, PRSI and the Universal Social Charge.
What are the filing requirements?
In situations where Vodafone shareholders made a capital loss on the “Return of Value” of €1,000 or less and providing these individuals had no other chargeable gains arising in the 2014 tax year, then there is NO requirement to file a Tax Return in relation to the Vodafone “Return of Value” unless of course, these individuals are otherwise required to do so under a different section of the Taxes Consolidation Acts 1997.
Why is this provision so beneficial to Taxpayers?
The loss arising on the “Return of Value” can be carried forward and written off against gains that may arise in the future resulting in a reduced Capital Gains Tax liability in that tax year.
Any other points to consider?
If a taxpayer prefers to have his / her “Return of Value” of €1,000 or less treated as Income, this information must be included in his / her annual Income Tax Return as outlined in Revenue’s Tax Briefing dated 14th May 2014.
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