ANALYSIS: A stable corporate tax environment is maintained, while those affected by pension changes must act now

THERE MAY not ever have been a more eagerly anticipated Finance Bill, given the announcement of a general election date had been predicated on its passage through the Oireachtas. However, the Bill itself contains only a few changes from the headline items announced on Budget day in December.

The significant change to the taxation of personal pension schemes is one such headline issue. The lifetime limit on tax relieved pension plans has been reduced from €5.4 million to €2.3 million. This has immediate and far-reaching implications for individuals and employers. At retirement the excess above the threshold will be liable to a 41 per cent tax within the pension fund.

The net amount after will then be liable to further personal tax (up to 41 per cent) and Universal Social Charge of 7 per cent leading to an aggregate tax rate above 69 per cent in respect of any excess above the limit.

Due to the penal taxation on pension funds exceeding the limit, immediate action is needed by those likely to be affected.

Another Budget announcement which generated much interest relates to the measures designed to restrict the utilisation of property-based tax incentives and the abolition of all such schemes from 2014. The Finance Bill effectively kicks this particular can further down the road to a new administration.

The provision will be placed on the statute books but will be subject to a commencement order. The order cannot be activated until the year following the publication of an economic impact assessment. This will delay such changes to 2012 or 2013 – if they ever come in at all. It will be interesting to see if this becomes an election issue.

On the wider income tax front, many of the Budget measures had already been brought forward with the passing of financial resolutions in the days after the Budget. Through a combination of lower entry points to the tax net and a reduction in the threshold beyond which the higher tax rate applies, the income tax base has been broadened. All PAYE taxpayers will see the impact of these changes in their payslips for January.

A new Employment and Investment Incentive (EII) is being introduced to replace the Business Expansion Scheme (BES). It will come into operation after the necessary approval from the European Commission has been received. The existing BES incentive will continue to operate in the meantime.

The Finance Bill sets out significant increases in the investment limits permitted under the EII incentive, which is positive news for indigenous businesses.

There are some changes proposed to section 110 of the Irish tax code, which provides for a special tax regime for “qualifying companies” engaged in specified financial transactions including securitisations. These companies can currently only invest in financial assets but this will now be extended to include commodities and plant and machinery leasing transactions. Both of these changes are very welcome.

On the other side, the tax deductibility of certain interest payments by section 110 companies is restructured.

There is, however, a “grandfathering” provision which protects the tax deductibility of continuing payments made under arrangements entered into previously.

On a macro level there is nothing in the Bill which is detrimental to Ireland Inc’s overall corporate taxation strategy. The 12.5 per cent corporate tax rate is here to stay. Combined with the retention of other important incentives, such as the research and development tax credit, it means Ireland continues to have a stable and competitive corporate tax environment.

Indeed, recent economic indicators show very positive signs for the real economy. In particular, the level of corporation tax payments made in November 2010 was up 13 per cent on the equivalent month of the prior year. It is not widely appreciated that this is a very instructive statistic, since it is based on an estimate made by companies of their profitability for the full year ended December 31st, 2010.

An increase of that magnitude strongly suggests that the private sector restructured its cost base during 2009 and is now more competitive.

This is a necessary prelude to both sustaining and creating employment and is a very strong positive indicator.

Feargal O’Rourke is the head of PricewaterhouseCoopers’ Irish tax and legal services department