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Government to publish revised Section 110 amendment to Finance Bill on Thursday, as hopes remain that other changes will avoid adverse consequences, as IFS industry awaits impact of Budget Back
October 17th 2016: As Government attempts to gauge the intricacies of suggested actions in the areas of QIAIFs, and the ICAV, regarding changes to taxation of Irish real estate, the next issue of Finance Dublin analyse the implications, and potential unintended consequences of attempts to give effect to actions on the IFS industry and Ireland's reputation as a stable location for foreign direct investment.
The Budget speech last week said:
"A number of concerns have been raised* about Section 110 of the Taxes Consolidation Act 1997. When this section was introduced the intention was that it would benefit the Financial Services industry, and it has done so. It is now being used in relation to property in a way that was never intended. I have published draft amendments to Section 110, to address these unintended uses. "

In a statement issued to Finance Dublin on October 17th the Department today said:

"On 06 September the Minister for Finance published a proposed amendment to Section 110 of the TCA 1997. This was to address the concerns being raised about the possible use of aggressive tax practices by some section 110 companies to minimise their tax liabilities relating to Irish property transactions. The purpose of the amendment was to restrict the use of the section 110 regime by non-resident investors involved in Irish property transactions.

"Over the past number of weeks, officials from the Department of Finance and the Revenue Commissioners have engaged constructively and at length with the main interest groups in this area, including the legal firms, accountancy and tax advisory firms, the Irish Debt Securities Association and the Irish Funds Industry Association. This was to ensure that the final amendment was targeted in such a manner to exclude bona fide securitisations.

"The final amendment will be published in the forthcoming Finance Bill on Thursday the 20th of October."

In the light of concerns in the IFS industry about the potential unintended consequences for jobs in Ireland's International Financial Services industry of actions designed to ensure that Irish property assets are subject to tax, the forthcoming issue of Finance Dublin will have extensive analysis of the various impacts of the Budget on the IFS industry.

Finance Dublin Editorial Comment:
It is to be hoped that the Government will not inadvertently damage the excellent reputation Ireland has as a lawful jurisdiction that respects and supports international norms of taxation, such as the proposed BEPS code, and does not ordinarily engage in arbitrary retrospective legislation, or special deals with taxpayers, instead operating a transparent tax code ahead of a proposed amendment to the section 110 regime in the 2017 Finance Bill.

Concerns have been raised that proposals to tax property funds, intended as transparent pass-through structures to facilitate financial engineering rather than tax planning, run counter to the BEPS process, as they could be seen as an attempt to "base erode" other countries' tax bases. There is consequently a concern that damage will result to Ireland's reputation amongst OECD countries, one of the original national supporters of the BEPS process.

Other worries exist that the measure will be seen as retrospective taxation of a state-led policy through NAMA that invited overseas investment funds in property to play a part in speedily sorting out the Irish property crash, through profit-driven incentives.

The political clamour to tax property gains from funds trading in Irish property assets has been led by former Social Democrat TD Stephen Donnelly, an independent deputy in the Irish parliament (Dail). His case rests on a contention that profits arising from trading in Irish domiciled assets should be taxed at source (Ireland) rather than at the end of the line, the ultimate profit earner, who, in most cases are in overseas jurisdictions. (Mr Donnelly asserted that funds 'have invested almost €20bn in equity in Ireland, (or over €40bn including their debt), that comes to almost €20bn in potential Irish taxes avoided").

This notion of a tax at source runs counter to the ages-old acceptance of the principle of avoiding double taxation, most recently affirmed in the OECD's BEPS (Base Erosion and Profit Sharing) action plans. It would be equivalent to suggesting that a London-resident equity investor in Ryanair or CRH shares should pay tax to Ireland on a capital gain derived from trading in the shares/assets of Irish domiciled headquartered entities.

CBRE: "many transactions and investment decisions have been put on hold until such time as there is clarity on the use of tax-efficient fund structures such as ICAVs and QIAIFs"
Marie Hunt, Executive Director & Head of Research at CBRE Ireland said: “As had been expected, the Minister confirmed in his Budget speech today that his department have in recent weeks been reviewing the use of tax-efficient fund structures such as ICAVs and QIAIFs. Many transactions and investment decisions have been put on hold until such time as there is clarity on this issue so it is frustrating that investors now have to wait until the publication of the Finance Bill later this month to get clarity on what is being proposed and how this might affect them.

"There is potential for unintended negative consequences for the property sector and the wider economy if tax changes are implemented without sufficient consultation, particularly if the measures are implemented in a manner that affects commitments already made or assets already acquired. These include damaging international investor and occupier appetite and potentially negatively impacting the valuation of Irish real estate assets, which were purchased legitimately through these structures. While it is frustrating that more detail wasn’t contained in the Budget today, considering the potential implications, it was somewhat encouraging to hear the Minister say that his department is loath to finalise a decision on this issue until they have conducted appropriate consultation”.

Irish Stock Exchange welcomes "long overdue" announcement to review stamp duty on share transactions
The Irish Stock Exchange (ISE) welcomed the announcement from the Department of Finance today to review the stamp duty regime on share transactions as part of the Government response to Brexit.

Director of Strategy, Aileen O’Donoghue said, “It is the right time for the Government to examine the impact of stamp duty on Irish companies and consider whether our economy is best served from taxing enterprise and productive capital in this way.

Investment capital is mobile and Irish companies are competing with enterprises worldwide for investors. Right now, Irish enterprises are at a serious competitive disadvantage – this is a constant refrain from international investors who are clear that there is a 1% tax on investing in Irish companies that doesn’t apply to most of their international peers.

The stamp duty regime needs to change. The review announced today is very welcome, long overdue and necessary in the context of Brexit which is likely to cause further competitive pressures on Irish companies.”

* See Report: Oireachtas Committee on Budgetary oversight. (The report summarises a paper introduced to the Committee by Mr Stephen Donnelly, an independent TD.)
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